Rising LNG prices – more than a seasonal trend?

As rising LNG demand pushes Asian spot prices toward double-digit annual highs, market observers are raising questions over the accuracy of extended oversupply forecasts. The S&P Global Platts JKM daily spot price hit $9.70/mn Btu in mid-November, after two months of steady increases, more than 80% above the 2017 low of $5.35/mn Btu.

Seasonal purchases have played their part, as the traditional north-east Asian buyers are now at the peak of their winter demand season, but longer trends have also been observed. The global transition to lower-emission energy sources is making LNG a key fuel of choice in existing and emerging Asian markets, encouraging coal-to-gas switching and boosting LNG demand. This trend has been further stimulated by four years of low LNG prices, supporting baseload demand creation in new markets seeking to address chronic energy deficits, such as Pakistan.

Overall, global LNG demand over January–October 2017 expanded by 10.6% year-on-year to 237mn tonnes, according to Platts Analytics, and most of that growth came from China.

Engine of growth

China’s policy directives encouraging coal-to-gas switching to combat air pollution mean that LNG imports are increasingly needed to feed the country’s enormous energy appetite. The replacement of coal-fired heating with gas-fired boilers at millions of Chinese households this year is boosting winter LNG purchases from the country’s northern terminals, and driving Asian spot prices to unexpected highs.

China imported 28mn tonnes of LNG in January–October 2017, up 47% from 19mn tonnes in the same period last year, and the trend is likely to continue.

Meanwhile, China’s gas demand is expected to see the largest absolute growth in 2018, and the country could become the second-largest LNG importer after Japan by the end of next year, according to Mel Sawaryn, Senior Lead Analyst with S&P Global Platts. The largest percentage increase is expected to come from LNG and domestic production, while pipeline imports will likely remain relatively stable, Sawaryn says.

Extended oversupply

The strength of demand in China and other emerging Asian markets is good news for an industry expecting massive amounts of new export capacity to come online. However, expecting tighter-than-forecast fundamentals based on the recent price spike is overlooking the strong seasonal nature of LNG and the recent support it has received from simultaneous rises in coal and oil prices, which continue to form the basis of most long-term LNG contracts.

A similar upward trend was observed in the JKM toward the end of 2016, as the north-east Asian markets entered the peak winter demand season, before prices dropped to just over $5/mn Btu by the end of March.

There is substantial LNG supply still due to come onstream, including an additional 80mn t/y starting up over 2018–2020, mainly from Australia and the US.

On the demand side, the rate of coal-to-gas switching in a higher LNG price environment is yet to be tested and will depend on strong policy aimed at reducing carbon emissions.

Meanwhile, the liberalisation of Asia’s domestic gas markets and greater flexibility in international LNG supply agreements will be crucial to ensuring sustainable LNG demand growth and to facilitating the vital role gas is set to play in the future energy mix of a post-COP 21 world.

To view the latest S&P Global Platts LNG report Dawn of a global commodity – LNG trading transformed, go to www.platts.com/lng-report

Table 1: Platts JKM spot LNG prices in $/mn Btu
Source: S&P Global Platts