Asian LNG prices on a downtrend as winter approaches

Prices for spot LNG deliveries to northeast Asia in December have remained lower this year compared to past years, as buying interest has become uncharacteristically limited.

This is the first time that LNG spot prices have not rebounded in the immediate run-up to winter.

The average of the ANEA, the Argus assessment for spot LNG deliveries to northeast Asia, for both first and second-half December deliveries fell throughout October in both 2021 and 2022. But there was a price rebound in November 2021 which does not seem likely to surface this year.

Spot activity in November 2021 picked up as winter neared, with buyers from all over Asia surfacing to make December purchases. This included Thai state-owned power producer Egat, Japanese utilities Tohoku Electric and Kansai Electric, Japanese gas company Saibu Gas, as well as Indian buyers Indian Oil (IOC), Gujarat State Petroleum (GSPC) and Gail, and major South Korean importer Kogas.

In contrast, Asian buyers have mostly refrained from making spot purchases in 2022, mainly because of relatively higher temperatures at this time of the year, which has resulted in lower inventory drawdowns.

The December-January intermonth contango structure has also widened significantly compared to previous years. This is likely as buyers have shown much less interest in winter deliveries this year. As a result, sellers have held back offers until later into the winter season on expectations that more buying interest will eventually emerge for January deliveries, hence lifting January delivery prices more.

The January ANEA remained at around a $1-1.80/mn Btu premium to the December ANEA across 1-4 November. This was significantly higher than the contango of $0.26-1/mn Btu over the same period a year earlier.

Most Asian buyers retreat from the spot market

A lack of buying interest from major LNG demand centers China and India has been the main reason for the absence of a rebound in December prices this year. Buyers in both countries have refrained from making spot purchases because of a combination of factors, including unsustainably high LNG spot prices, and a relentless zero-Covid-19 policy in China, which has in turn resulted in the switching out of LNG for relatively lower-priced and more readily available alternative fuels such as coal, fuel oil,and LPG.

Japanese and South Korean buyers, which make up another significant proportion of spot LNG demand in the run up to winter, have also mostly stayed out of the spot market and instead left procurement in the hands of their major state-owned importers.

Uncertain price outlook

Market participants are divided on whether prices will pick up moving into the winter season.

Emerging expectations of a mild winter may do little to encourage demand from Asia and Europe.

The weather in December to mid-January is set to remain mild in China, but temperatures could start to drop below seasonal norms in mid-January and February in many areas, including the north and northeastern parts of the country, according to latest forecasts from China's National Climate Centre. This may further limit demand for gas-fired power over the 2022-2023 heating season, market participants said.

On the other hand, higher prices will likely not put off most northeast Asian buyers from procuring additional deliveries during peak winter, most market participants said.

Market participants are also waiting to see if mild weather in Europe continues. Forecasts for temperatures to remain largely above seasonal norms during the rest of November and through the first half of December — together with little remaining empty underground storage capacity and quick LNG regasification — have weighed heavily on the region's prompt gas prices in recent weeks. But as Europe looks further into winter and summer stockpiling with highly reduced Russian pipeline gas supply, there has been a price incentive to keep underground stocks in place and maximise imports, although this would likely be insufficient to fully meet demand in the event of colder weather.

By Subethira Ahrumugam and Samuel Good

ANEA Dec 2022 vs ANEA Dec 2021 $/mn Btu