Recovery in Asia spot LNG price more about supply than demand

The spot price of LNG for delivery to north Asia is continuing to recover, but the increase appears to have more to do with supply issues than any rebound in demand.

The spot price of cargoes for October delivery rose to $4.50 per million British thermal units (mmBtu) in the week ended Sept. 4, an eight-month high and some 143% above the record low of $1.85, reached in two separate weeks at the beginning and end of May.

While that looks like an impressive rally in percentage terms, it's worth noting that the spot price is just slightly higher than the $4.40 per mmBtu in the same week in 2019, and otherwise below the price that prevailed at this point in the year in every year since assessments began in 2010.

Given the scale of the price rally, it's tempting to immediately assume that there has been a surge in demand for LNG as various countries across Asia try to rebuild their economies after the hit from lockdowns to combat the novel coronavirus pandemic.

However, there isn't too much evidence to support that view in the vessel-tracking and port data compiled by Refinitiv, which monitors the flow of LNG cargoes.

Looking at Asia as a whole, Refinitiv data show 161.8 million tonnes of the super-chilled fuel was delivered in the first eight months of the year, up slightly on the 159.6 million tonnes for the same period in 2019.

Since the price recovery started from June onwards, it's worth looking at whether imports have increased in July and August, and here the evidence is not convincing.

Asia's LNG imports in August were 19.78 million tonnes, down from 20.34 million in the same month last year, while July's were 19.33 million, down from 20.29 million in July 2019.

However, two of Asia's main buyers that purchase a greater percentage of their cargoes on a spot basis have been increasing imports.

China imported 5.91 million tonnes in August, up from 5.14 million in the same month last year, while it's July imports were 5.27 million tonnes, up from 4.63 million in July 2019.

India's imports were 2.19 million tonnes in August, up from 1.88 million a year earlier, while it's July purchases were 2.42 million, up from 2.04 million.

Asia's biggest LNG buyer, Japan, has been relatively steady in its imports, with Refinitiv data showing 6.26 million tonnes in August, virtually unchanged from 6.29 million a year earlier, and July's 6.0 million down a tad from 6.4 million in July last year.

South Korea, the third-ranked buyer, saw a marked drop in August cargoes to 2.20 million tonnes from 3.2 million a year ago, while July imports were 2.21 million, down from 2.96 million in the same month in 2019.

However, South Korea's January-August imports are only slightly down at 25.9 million tonnes from 26.1 million in the first eight months of 2019.

Overall, the demand picture that emerges from Asia is that despite the pandemic, volumes have held up. However, the modest 1.4% rise in the first eight months indicates that demand is unlikely to have been the major driver of spot LNG's volatile price movements.

SUPPLY IS KEY

Rather, it seems supply factors have been driving prices, with the overhang of available cargoes in the first half of the year a particular drag.

It's no secret that the commissioning of new LNG trains in Australia, the United States and elsewhere pushed the market into a supply surplus in 2019, and the coronavirus pandemic certainly choked off hopes that rapid demand growth would help balance the market.

The recovery in prices since the middle of year seems to be largely built on the idling of some LNG output in the United States, which cut the flow of U.S cargoes to Asia.

Just 14 vessels carrying 971,000 tonnes of U.S. LNG were offloaded at Asian ports in August, the lowest volume since September last year and less than half the 2.13 million tonnes discharged in May, which was the strongest month on record.

There have also been maintenance-related shutdowns in Australia, which overtook Qatar to become the biggest exporter of the fuel after building eight new projects over the past decade.

Chevron has had one of the three trains at its massive Gorgon project in Western Australia state offline since May, and although it intends to restart the unit next month, it also plans to perform staged shutdowns of the other two trains, the first in October and the second in January.

Royal Dutch Shell is in the process of restarting its 3.6 million tonnes a year Prelude floating LNG plant, which has been offline since February, but has yet to state when it will return to operation, Argus reported on Sept. 4.

While watching for any shifts in demand ahead of the northern hemisphere winter will be important, keeping an eye on rising supply from the United States and Australia is also likely to prove key.

(Editing by Richard Pullin)

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