Natural Gas: Is The Weather Still Bearish?

Asian spot LNG prices dropped to as low as around $1.85 per million British thermal units (mmBtu) in May last year as coronavirus-induced lockdowns hammered gas demand, but shot up to a record $32.50 per mmBtu this week after an Asia-wide cold snap pumped up gas demand and drained stocks. 

"The recent volatility in LNG spot prices will increase the appeal of more stable oil-linked contract prices," said Robert Sim, research director at Wood Mackenzie.

Oil-linked term cargoes make up around two-thirds of supply in Asia, the world's top LNG-consuming region.

Long-term LNG contracts are typically linked to Brent crude prices as there are no uniform global gas prices for users to hedge against, though buyers and sellers had in recent years been exploring a hybrid mix of European, U.S. and Asian gas prices in contracts.

The allure of hybrid contracts tied to spot gas prices has diminished, however, following the recent volatility.

"The recent volatility may give buyers some added incentive to look more closely at long-term contracts, which they have been resisting in recent times in favour of mid-term deals and reliance on the spot market," said Anthony Patten, a partner at law firm King & Spalding.

"Maybe oil-linked pricing will become more appealing again, or if JKM is used, price ceilings might be included to protect buyers who have entered into term commitments from these types of spikes," he said, referring to the Japan-Korea-Marker (JKM) published by price agency S&P Global Platts and which is used as a reference point in spot markets.

Oil contracts are typically easier to hedge against Asian gas price risk as the oil derivatives market is more liquid and easier to access than the nascent and thinly-traded Asian LNG derivatives market.

A lack of spare capacity and limited storage options in Asia also makes the LNG market susceptible to sudden jolts in demand and supply, industry sources said.

Still, with temperatures in North Asia expected to rise soon, and more supply anticipated, spot prices will likely ease and narrow the gap with oil-linked prices, sources added.

Source: Reuters