The markets of crude oil and liquefied natural gas (LNG) in Asia are currently awash with fuel. Yet, futures prices pointed to different market situations in oil and LNG as winter approaches.
Before last week, the closely linked crude oil and LNG markets in Asia were in opposite situations, despite the fact that supply is currently outstripping demand for both commodities. The futures price curves of oil and LNG have recently flipped, with prices for oil pointing to higher prices further out in the future, while the LNG price curve pointed to lower prices in the future compared to those for immediate delivery.
Just two months ago, in October, spot oil prices hit four-year highs amid concerns that most of Iran’s oil supply would disappear once the U.S. sanctions returned. Back then, the Brent Crudefutures curve was in steep backwardation—the market situation in which front-month prices are trading at a premium compared to prices further out in the future—a sign of a tighter and undersupplied market, and a situation in which storing oil for later delivery is unprofitable.
Flipping the oil market into backwardation and keeping it that way was one of the key officially stated goals of OPEC and allies in their original deal at the end of 2016 to clear the global glut.
Despite earlier doubts, the partners succeeded to wipe out the glut and prop up oil prices this year. Crude prices rallied at the end of the summer and early fall as fears mounted over a supply crunch with the U.S. sanctions on Iran’s oil. But after the U.S. granted waivers to eight key Iranian buyers—including the biggest customers China and India—oil prices slumped, dragged down by re-emerging fears of oversupply due to record production in Saudi Arabia and Russia—the leaders of the OPEC+ deal—and all-time high production in the United States. The market was also spooked by emerging fears of slowing economic and oil demand growth. Several severe sell-offs in November flipped the crude oil futures curve into the opposite of backwardation, contango—a market structure in which front-month prices are lower than prices out in the future months—pointing to a crude oil oversupply and making storing oil for future sales profitable.
In LNG in Asia, the price curve trend early last week was just the opposite to the oil futures curve, despite an apparent oversupply of the chilled gas—and this has baffled traders.
In October, the LNG futures curve was in contango—a sign of an oversupplied market.
In recent weeks, weather has been warmer than usual in many parts of Asia, and China had already procured most of its winter LNG requirements earlier this year after the rush and gas shortage in last year’s colder winter. As a result, LNG demand and prices in Asia have been dropping in recent weeks. Some traders—unable to find enough buyers for their LNG cargoes—had started to float LNG ships sitting as storage off the coasts of Singapore, Malaysia, and offshore South China. When traders started to do this, the LNG futures curve was still in contango, meaning that prices for later delivery were higher than ones for immediate dispatch. But even with the contango structure, storing LNG tends to be a much trickier undertaking than storing oil at sea. The charter rates are high—as high as US$160,000 per day actually—and keeping the super-chilled fuel for long leads to the gas evaporating, diminishing the value of the LNG cargo.
Plunging spot LNG prices in Asia and the flipping of the market curve from contango to backwardation helped to clear some of the LNG cargoes off Asia’s coasts that have been sitting there since October.
“When the traders started floating the cargoes, the market was in a contango of about $1, but it has now flipped into backwardation, so there is more urgency to sell the cargoes,” a Singapore-based trader told Reuters early last week.
At the end of last week, however, the LNG futures for February compared to January returned to contango—with prices for February higher than those for January. Spot LNG prices for January delivery slumped to their lowest since May this year, and were lower than last year’s prices for the first time in 2018, due to the release of some stored LNG cargoes and to lower than usual demand for the winter months, because of milder weather and because Asian buyers had rushed in to secure LNG supplies as early as in September and October.