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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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Why LNG Prices Are Poised To Soar

LNG carrier

Global liquefied natural gas (LNG) markets in Asia are convulsing, undergoing yet another fundamental shift amid increased demand for the super-cooled fuel.

Last week, spot prices for LNG in Asia, a region that makes up around two-thirds of all LNG demand with that demand growth set to increase amid more gas usage in China, spiked again, reaching $9.60 per million British thermal units (MMBtu), an increase of some 32 percent since mid-April. At the beginning of this week, prices for the fuel reached near the $10/MMBtu mark.

LNG demand is seasonal and typically peaks during winter season in colder northern Asian markets, while demand wanes during milder spring season months, while picking up again during hotter summer months when more consumers use air conditioning.

Pricing pivot

This year, however, all that has changed. The reason? Demand has strengthened due to stricter environmental standards and rising economic growth. However, as prices increase to multi-year highs, this could cause end-users, mostly industrial users, to shift back to cheaper fuel sources. Coal, historically a cheaper alternative for gas and often used for power generation in Asia could benefit from this development. LNG, for its part, has a hard time competing with coal on a pure cost basis, even though it offers environmental advantages.

Meanwhile, LNG imports to China and Pakistan during the first five months of 2018 increased over 50 percent from last year, while shipments to India, South Korea, Taiwan and Singapore jumped by about 15 percent to 30 percent, Reuters said on Monday. Lower LNG storage from the world’s top LNG importer, Japan, and also top LNG importer, India, has also caused more unseasonal demand for LNG. Related: Goldman: OPEC Must Raise Production

China’s increased procurement of the super-cooled fuel earmarked for storage in anticipation of demand spikes for the upcoming winter season is also causing spot prices to jump. Last year, northern China experienced a severe gas shortage as the government rushed to replace dirtier burning coal used for power generation with cleaner burning gas.

The shortage was somewhat of an embarrassment for energy planners in Beijing, bringing criticism from both within and outside the country. The government had to divert gas from industrial users to residential users to make up for the shortage, causing a temporary shutdown in several key industries. This time around Beijing doesn’t plan to be caught flat-footed and is on an LNG buying spree, uncharacteristic for this time of year.

Kittithat Promthaveepong, a senior analyst at consultancy FGE, said this week that higher oil prices and China’s continued buying of spot cargoes so far this year is also supportive of increased LNG demand and the rise in spot prices in the region.

“This is driven mainly by three factors: lower domestic gas production due to maintenance at gas fields, industrial demand due to fuel switching away from oil, and early stock building to prepare for the coming winter,” he added. Related: Anti-Qatar Threats Could Jeopardize OPEC Meeting

Moreover, forecasters are predicting a hotter than normal summer season which will also increase demand in the coming summer months, putting more upward pressure on LNG prices in the region.

Prices going forward

Many analysts, including Nicholas Browne, an LNG analyst at energy consulting firm Wood Mackenzie agrees that prices are poised to trend upward. He said that Asian LNG prices could end the year at nearly $12/MMBtu.

To put this price increase in perspective, JKM spot prices for LNG in Asia at the start of June in 2015 were at $7.5/MMBtu, according to numbers provided by commodities data provider S&P Platts Global. During this period in 2016, prices were at $4.9MMbtu and last year at $5.375/MMBtu.

By Tim Daiss for Oilprice.com

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