Softer spot LNG prices see demand gain, contrast with contract pain

(Reuters) - Lower spot prices for LNG in Asia have yet to drive a significant boost in demand for the super-chilled fuel, although there is an increase in appetite from price-sensitive buyers such as India and China.

Asia's imports of LNG are estimated at 22.59 million metric tons for March by commodity analysts Kpler, slightly below the 22.69 million recorded for February.

Given the seasonality of LNG demand, which peaks in the northern winter and summer, it's worth looking at the year-earlier months, and here the story is of modest import growth.

The estimated imports in March are 4.2% higher than the same month in 2023, while February's arrivals were 4.6% above the same month last year.

The small increase in arrivals in the world's biggest LNG importing region contrasts with the steep fall in the spot price for delivery to North Asia LNG-AS.

The spot price was $8.60 per million British thermal units (mmBtu) in the week to March 8, up slightly from the three-year low of $8.30 reached on Feb. 23.

The current spot price is 41% below the $14.50 per mmBtu that prevailed in the same week in March last year.

However, given the lag between when spot cargoes are bought and physically delivered, it's worth noting that the price at the start of January 2023 was $25.00 per mmBtu, which was 55.2% higher than the $11.20 in the first week of this year.

The lower spot price has driven some increased buying from countries that have historically bought more when costs drop, such as the South Asian nations of India and Bangladesh.

India's LNG imports are on track to reach 2.01 million tons in March, up from 1.98 million in February, according to Kpler.

March's arrivals are expected to be 9.2% higher than the same month in 2023, while February's were 56% stronger than the year-earlier month.

Bangladesh is expected to import 500,000 tons of LNG in March, up 11% from the same month in 2023, while February's arrivals of 400,000 tons was an increase of 48% from the year-earlier month.

China, the world's biggest buyer of LNG, is also viewed as something of a price-sensitive importer, given its mixture of both long-term contracts and spot cargoes.

China's imports are estimated at 5.99 million tons in March, up 10.3% from the same month in 2023, while February saw arrivals of 5.82 million tons, a jump of 17.1% from the year-earlier month.

With spot prices below the cost of crude oil-linked contracts, it's likely that China will seek to buy more spot cargoes, while using any flexibility in its term agreements to lower these volumes.

CONTRACT PAIN

The terms of long-term LNG contracts are rarely disclosed, but a common agreement would see LNG priced on a slope against Brent, with the average price per mmBtU running at about 13.5% the price of a barrel of oil.

At the current Brent LCOc1 price of $81.92 a barrel, this means contract LNG would be around $11.06 per mmBtu, a premium of about 29% to the current spot cost.

The difference between spot and contract prices can be seen in imports by Japan, the world's second-biggest LNG importer and a buyer that gets the bulk of its cargoes under long-term contracts.

Japan's imports are estimated at 5.13 million tons in March, down 6.9% from 5.51 million in March last year, while February's arrivals of 6.07 million were 6.5% below the year-earlier month.

It's a similar story for South Korea, Asia's third-biggest LNG importer and another buyer that uses mainly long-term contracts.

South Korea's March arrivals are estimated at 3.08 million tons, a drop of 30% from the same month in 2023, while February's imports of 3.82 million tons were down 24.4% from the year-earlier month.

The overall picture from the LNG market in Asia is that the lower spot prices are driving some additional buying by developing economies, but the higher contract prices are limiting demand in more developed markets such as Japan and South Korea.

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