Weather forecasters are predicting a harsh winter for Asia, and while this would hardly be good news for anyone in the region, it happens to be great news for LNG exporters.
Producers of liquefied natural gas were hammered no less mercilessly by the coronavirus pandemic than their oil-producing peers. On top of that, the LNG market was already oversupplied—just like the oil market—when the coronavirus began its global march. As a result, prices for the so-called bridge fuel slumped to about $2 per million British thermal units, making a lot of LNG non-competitive and leading to delays in several final investment decisions in the United States.
While the FIDs are unlikely to be revisited anytime soon, spot prices are improving. The Nikkei Asian Review reported last week the price for LNG had hit $5.20 per mmBtu, which was nearly triply the price of the commodity this spring when the glut and the pandemic combined to drive it down. It is still short of the average of $6 per mmBtu, at which LNG traded a year ago, the daily noted.
This week, Reuters’ Clyde Russell reported that spot LNG cargos to be delivered to Northeastern Asia next month averaged $5.50 per mmBtu. This is the highest price for the commodity so far this year, supported by worries about supply disruptions along the U.S. Gulf Coast because of the heavy hurricane season. But the main factor is the weather. Forecasters in Japan have said there is an excellent chance of La Nina developing, which would bring colder temperatures, hence greater demand for heating. As a result, Russell notes, LNG cargos for December delivery in Northeastern Asia trade at a $0.20 premium to the cargos for November delivery.
LNG demand normally improves during the winter in the northern hemisphere, but mild winters have played a bad joke on producers before. For now, all looks set for a little bit of ordinary amid the whole pandemic havoc, with Japanese forecasters saying the likelihood of a La Nina was 90 percent.
“We expect LNG demand to increase by four billion cubic meters this winter and that’s led by growth in China, Japan and South Asia,” said analysts from Refinitiv, as quoted by Gasworld, earlier this month. “LNG supply is expected to grow by three billion cub meters, led by the US. And when we put together demand and supply forecast, we expect the LNG market to be slightly tighter than last winter by one billion cubic meters.”
This would be more much needed good news for LNG producers. In support of this demand and supply forecast, the latest import data from China is also positive, with LNG imports going up to 5.96 million tons in August, from 5.19 million tons a year ago, Argus Media reported in late September. Industrial activity in China is improving, and rising LNG imports are one of the indicators.
Imports are rising regionally, too, according to Refinitiv data cited by Reuters’ Russell in his commentary. The data showed that September deliveries of liquefied natural gas to the continent stood at 20.68 million tons. That’s up from 19.86 million tons in the previous month and 19.44 million tons a year earlier. China’s LNG intake fell in September, but Japan’s rose.
Against this background, Europe’s lackluster demand for LNG could be overlooked for the time being. As long as weather forecasts are accurate, LNG is in for further price rallies. If the forecast weather trends do not pan out, however, there’s a substantial downside potential for prices. Luckily for LNG producers, Asia is faring better overall in its fight with the coronavirus, so the risk of new lockdowns, which could affect prices negatively, is smaller than it is in Europe, where the new lockdowns are already being scheduled.