Rising demand from key markets drives up spot LNG prices in Asia

Spot liquefied natural gas (LNG) prices in Asian markets are at record high levels for deliveries due in February 2021. These prices are driven by a harsh winter in North East Asia pushing up demand for spot LNG in Japan, South Korea, and China.

“The spot LNG price in Asia is highly sensitive to marginal demand in Japan, Korea, and China. Since these places are experiencing harsh winter, the heating load has gone up significantly. Emergency (unplanned) buying by Japanese power companies is the driving factor for pushing up prices,” Debasish Mishra, Partner at Deloitte said.

Natural gas price in the spot market (headed for North East Asian countries) is broadly represented by the LNG Japan/korea Marker (JKM). Prices for deliveries due in February zoomed to over $ 32 per million British thermal units (mmbtu) last week. These never-seen-before record high levels were following a firming up of prices from December 2020 that had risen to above $ 12 per mbtu. “Since May, when the JKM Asian spot LNG price bottomed out below $2 per mmbtu due to oversupply, the market has enjoyed a remarkable rally, the JKM increasing more than 16fold to a record high of $32.50 per mbtu in January,” a report by S&P Global Platts said.

The multi-fold price explosion is the result of a potent cocktail of pent-up gas demand, that had plummeted in the pandemic, and lack of adequate transport.

“This (the price hike) was driven first by an unprecedented supply-side response to low prices, with US LNG cancellations starting to rebalance the market through the summer, followed by strong winter buying demand from Asian buyers in the fall and a number of supply-side issues. Since the start of 2021, cargo shortages, transportation bottlenecks, record shipping rates, and plunging winter temperatures have lent support to the market,” it said.

The surge in demand was such that LNG sellers to Pakistan LNG (a public sector company in Pakistan) refused to supply contracted quantities due in February 2021. These contracts were awarded in December 2020, but two weeks into January 2021, the gas suppliers expressed inability to meet the terms of delivering in February.

According to a note from the Institute for Energy Economics and Financial Analysis, emerging markets such as Vietnam, Pakistan and Bangladesh, amongst others, that are looking at LNG to provide a source of power, will be faced with more volatile and also higher prices. IEEFA says that Vietnam, Pakistan, and Bangladesh have over $ 50 billion of proposed gas-fired power projects at risk of cancellation from unaffordable LNG prices.

It is estimated that 11 to 12 per cent of the total natural gas consumed globally is through short term LNG trade mostly focused on North East Asia.