Two-month Global LNG Rally Ends, Weak Oil Tempts Buyers

Maritime Activity Reports, Inc.

October 3, 2014

Asian spot liquefied natural gas prices ended their 2-month rally this week, interrupted by weak demand in Japan and South Korea as falling crude oil prices push importers to turn to oil-linked long-term LNG supplies.

Spot LNG prices for November delivery lost ground to $14.60 per million British thermal units (mmBtu), versus $15 per mmBtu last week, amid still scarce demand from end-users in Asia.

Most LNG trade takes place via 20-year supply deals offered by major oil companies and producer countries such as Qatar, where buyers pay a price linked to the cost of crude oil.

With the benchmark Brent crude price slipping nearly as far as $92 a barrel, from $105/barrel several weeks ago, oil-linked LNG for delivery in January is becoming increasingly competitive against spot priced cargoes.

That is likely to spur importers across Asia to call on additional long-term supplies where possible, potentially shrinking liquidity in spot markets, one Asia-based trader said.

"Brent is coming off a cliff and that's making long-term pricing look competitive. Obviously the long-term deals have a lag to oil prices of about three months, and that's why we should start to see less demand for spot cargoes from January," he said.

"The big spread between long-term and spot cargoes could start to change buying behaviour."

The award of several cargoes from the North West Shelf LNG project in Australia on Friday is being closely watched as a potential bullish spot price signal, largely because its last tender in August kicked off the recent rally.

Price information about the current tender has been slow to emerge, however, with traders keeping close tabs on the outcome.

Exxon Mobil's Papua New Guinea LNG plant is due to award another batch of cargoes soon, constituting another potential price signal for the market, traders said.

"PNG cargoes have not been awarded and I have not heard any awarding price for NWS," said a European trader.

A source involved in the tender said trading houses were the likely winners, Vitol and Glencore in particular, although this could not be confirmed.

Small-scale Japanese utility buyers Kyushu Electric and Chubu Electric are also believed to have participated in the tender via a domestic trading house.

"They awarded a mix of FOB and DES cargoes with pricing in the $14 range," the Asia-based trader added.

Run-up Loses Steam
A "speed bump" in the rally was widely expected mainly because price gains over the past two months were driven by portfolio players, such as oil majors with large LNG books, filling short positions, some traders said.

"Gains were caused by short filling and I think that is widely acknowledged now. The market is not exactly flushed with demand and pricing may have been inflated to begin with," a trader said.

Some traders point to seasonal price slumps in Asia, especially during typical low power demand periods of September-November, as the cause of the current price slide.

"In theory demand should be there for December and January, we don't think that prices will keep sliding like they did this summer," another trading source said.

"It is true that Kogas (the world's biggest LNG buyer) is still out of the market and that we had a mild summer in Japan, but the NWS and PNG tenders could be a game changer," he said.

Atlantic Markets
A mixed picture of demand has emerged from South America, with Brazil importing steadily at around 1 million tonnes/month of LNG recently even as Argentina struggles to absorb already committed volumes.

Argentina, which was also importing steadily from June until September, is now scrambling to accommodate incoming cargoes as healthy hydroelectric reserves and high LNG stockpiles has caused a vessel logjam outside some of its terminals.

Three cargoes are currently waiting to unload outside Argentina's Bahia Blanca terminal, several sources said.

In the shipping market, vessel availability in the Atlantic market is tightening and day-rates are rising, whereas the Pacific market remains loose, a shipping source said.

(Reporting by Oleg Vukmanovic; Editing by Michael Urquhart)

Maritime Reporter Magazine Cover Nov 2019 - Workboat Edition

Maritime Reporter and Engineering News’ first edition was published in New York City in 1883 and became our flagship publication in 1939. It is the world’s largest audited circulation magazine serving the global maritime industry, delivering more insightful editorial and news to more industry decision makers than any other source.

Maritime Reporter E-News subscription

Maritime Reporter E-News is the maritime industry's largest circulation and most authoritative ENews Service, delivered to your Email three times per week

Subscribe for Maritime Reporter E-News