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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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What’s Behind The Plunge In LNG Prices?

Spot prices for liquefied natural gas (LNG) in Asia continues to drop, plunging to six-month lows in recent trading, an unusual move for the super-cooled fuel given this time of year when prices usually fetch a premium. Spot prices for January delivery dropped one dollar to $8.80 per million British thermal units (MMBtu). This marks the lowest price point since May and well below levels from the same period a year ago. Prices have now returned to contango, a commodities pricing development, also sometimes called forwardation, where the futures price of a commodity is higher than the anticipated spot price at maturity of the futures contract.

Contango in global oil markets often sees producers and traders storing oil on-board tankers for specified periods of time, hedging to make higher profits in the future when prices trend upward again. However, holding cargoes for extended periods of time on LNG tankers is more complicated since boil off occurs the longer the fuel is stored. Holding LNG cargoes is also more expensive than storing crude in seaborne tankers since the fuel has to be kept at a temperature of minus 162 degrees Celsius to prevent regasification. Notwithstanding, the last few months have seen numerous LNG tankers off the coast of Singapore and Malaysia waiting for LNG prices to increase, particularly since tankers using recent technology has made it increasingly feasible to hold cargoes for longer periods of times.

Warmer temperatures persist

Prices for February delivery also dropped, but not as much, and were estimated at around $9.00 to $9.30/MMBtu. The unseasonably low prices for spot LNG comes as warmer temperatures in the Northern Hemisphere persist and also following increased, even frenzied, LNG buying by Asian utilities in September and October that filled up storage for the coming months. Lower global oil prices, off nearly 30 percent from highs seen in early October, have also put downward pressure on LNG prices in Asia. Most long-term LNG off-take agreements in the region still use an oil-indexation pricing formula. Though spot LNG prices aren’t linked to oil prices, a drop in the price of the commodity still impacts the cost of the super-cooled fuel in short-term trading. Related: One Houston Gas Player Is Changing The LNG Business Forever

The start of winter in North Asia, which accounts for 72 percent of global LNG demand, with that amount projected to increase to 75 percent shows a marked difference from last winter where freezing temperatures hit northern China particularly hard, catching the country’s energy planners flat-footed. This time last year, Beijing’s push to clean up its environment by switching to more gas to offset coal usage had a cataclysmic effect on not only the country but LNG spot prices in the region. It also created a shortage of fuel need for heating in some regions of the country in the dead of winter, sending prices of domestic LNG to three-year highs.

China could still be tested

The situation became so grave last year that industry had to temporarily shut down in the northern parts of the country, with as being re-diverted to residential end users. The government also allowed the return of recently idled coal usage to make up for the lack of fuel. This year, China prepared early by filling storage tanks early as well as increasing domestic gas demand, a move that so far hasn’t been tested.

However, if weather patterns change this winter, China's gas supply could be tested again, while LNG prices both within China and in the Asia-Pacific region would see pricing support.

U.S. patterns

Moreover, in the U.S. natural gas prices have also plunged as weather forecasts show only one brief cold snap for the remainder of the month. Forecasts may be frosty in the days leading up to Christmas, but a lack of reinforcing cold shots seen in the days after sent natural gas prices barreling lower Wednesday, NYMEX-traded January gas futures contract finally broke out of its recent trading wedge as it plunged 27.1 cents to settle at $4.136. February tumbled 22.3 cents to $4.035, and March dropped 18.8 cents to $3.853, the report added.

By Tim Daiss for Oilprice.com

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Leave a comment
  • Tyler on December 13 2018 said:
    I know you guys are trying to speculate the reasons for lower prices...but higher temperatures is absolutely not a reason. It's 16 degrees Fahrenheit in Beijing and North America is completely frozen, despite the fact that it is not even winter.

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