Unexpectedly strong demand from China, along with rising oil and coal prices, should keep Asian liquefied natural gas (LNG) spot levels buoyant this winter.
Despite rising supplies from new plants, spot prices have risen by 55 percent from their 2017 lows to $8.40 per million British thermal units (mmBtu) as Asian buyers also refilled summer stocks.
With the peak demand October-March winter gas season almost underway, further price gains are expected.
Nuclear outages in Taiwan and rising demand from Thailand, as well as new buyers like Pakistan, are absorbing oversupply of LNG faster than expected, traders and analysts said.
Andrew Walker, vice president of strategy at U.S. LNG exporter Cheniere
, said there was "very strong growth in China this year," adding that demand from Japan and South Korea was also robust.
Still, while Asian LNG prices are likely to keep rising, the pace could moderate as traders say healthy stock levels and more nuclear, coal and renewable generation in top buyers Japan and South Korea could cap their winter demand.
"A lot of factors are coming together, which means the market has stayed more balanced than people expected," Walker told Reuters during an industry event in South Korea.
Higher coal prices have contributed to low power station stocks across India and China, prolonging LNG demand in countries typically unwilling to pay much above $7 per mmBtu, according to one analyst.
Gail India, Gujarat State Petroleum Corporation and Reliance Industries are all seeking winter supply.
Oil prices near two-year highs are also helping lift spot LNG demand as buyers choose between 20-year, oil-indexed LNG supply or spot cargoes, whichever is cheaper.
China Buying Spree
As in previous winters, Chinese imports - up 44 percent over the January-August period from a year earlier - are dictating Asian price trends.
Under a drive to improve air quality by switching away from coal, China could overtake South Korea as the world's second-biggest LNG importer this year if current trends continue, import data shows.
Strong growth in Chinese LNG demand could be partly offset, though, by greater availability of piped gas supply from Central Asia this winter, potentially limiting price spikes on international gas markets.
While spot LNG prices for November are trading higher at $8.40 per mmBtu, they are still far short of the $20 per mmBtu mark reached in February 2014 when supply was tight.
Since then, 74 million tonnes per year of new production has poured out of plants in Australia and the United States, pushing down prices and bridging gaps in supply between regions, with another 89 million tonnes due by 2020.
Reuters trade data shows that there is increasing spare capacity in LNG markets, meaning that the general outlook for the market remains one of oversupply and relatively low prices.
"A lot of LNG is coming ... There's no doubt that will create market softening over the next two years," Walker said.
The first exports from Australia's Wheatstone, Cove Point in the United States and Russia's Yamal facility in the Arctic are expected in the fourth quarter of 2017.
However, Chevron's Wheatstone project, which had been due to start producing LNG this month, is running behind schedule, a bullish factor for prices.
That, coupled with higher output from existing plants, will add 8.7 million tonnes more LNG supply this winter compared with a year ago, Anne-Kat Brevik, head LNG analyst at Thomson Reuters said.
Forecasters expect winter temperatures for northeast Asia, including Japan and South Korea, to be milder than average, reducing the likelihood of a surge in winter demand from those buyers.
However, outside Asia low hydro levels across Spain, Italy, Portugal and Brazil should keep Mediterranean and Atlantic demand for LNG firm during winter.
European LNG supply holders are also holding onto production amid concerns about potential nuclear outages in France, low European storage inventories and curbs on Dutch output causing gas shortages.
"They are worried about getting caught short if there's a repeat of last winter's nuclear power supply crisis in France," a trader said.
(By Oleg Vukmanovic and Henning Gloystein; Aditional reporting by Jane Chung in Seoul; Editing by Susan Fenton)