LNG Update: High inventories cap Asian LNG price upside – sustained cold weather key to driving gains

While Asian LNG prices have briefly flirted outside their recent trading range in response to bouts of unplanned liquefaction glitches and gains in European gas hub prices, lacklustre end-user demand amid high inventories in the region has moderated the upside.

And a prolonged period of cold weather in Asia this winter could be one of the very few factors that can move the dial.

The front-month price of the Platts Japan/Korea Marker (JKM) – a benchmark price assessment for physical spot LNG cargoes delivered ex-ship (DES) into Japan, South Korea, Taiwan and China – mostly traded in a tight $2-3/MMBtu range of between $12/MMBtu and $14s/MMBtu from August this year.

That was until recent days, when it breached the $15/MMBtu mark. It was last assessed at $15.302/MMBtu (January contract) on 26 November, up from $14.781/MMBtu a week earlier on 19 November. The front-month JKM price averaged $13.490/MMBtu from 1 August to 20 November this year and was last above $15/MMBtu on 7 December 2023 at $15.097/MMBtu.

But the price on 26 November is down by $0.034/MMBtu from $15.336/MMBtu the previous day and $0.046/MMBtu lower than $15.348/MMBtu on 21 November, when it first surpassed the $15/MMBtu threshold, sparking questions on how much more upside there could be — or even just how sustainable the upside is.

Unplanned outages hit Pacific LNG projects

The 4.9mtpa Pluto LNG project in Western Australia had a full unplanned shutdown on 25 November due to a fault in the Pluto control system, a Woodside spokesperson told SSY LNG on 27 November, adding that the issue was under investigation. She said that the company had “commenced preparation to safely restart the facility on Tuesday [26 November]”, but did not mention when the facility was expected to actually restart and resume normal operations.

The third 3.8mtpa train of the 11.4mtpa three-train Tangguh LNG in Indonesia has as of 27 November not restarted following a trip on 16 November, SSY LNG understands, despite earlier expectations that it would resume operations on 23 November and reach 100% production on 25 November. That expected restart date was later shifted to 26 November, but was likely not adhered to as well.

The 7.2mtpa two-train Brunei LNG project in Lumut experienced an “operational upset”, the company said on 19 November, but has likely recovered as of 27 November, SSY LNG understands. The company said on 22 November that it was “in the process of a safe start-up”.

TTF gains lend support

The Dutch Title Transfer Facility (TTF) – a virtual trading point for natural gas in the Netherlands and a pricing proxy for the European LNG market – has gained strength in recent weeks, lending support to Asian LNG prices.

The TTF front-month price settled at the highest level in nearly a year at $14.840/MMBtu (December contract) on 21 November, with it last higher at $14.961/MMBtu on 24 November 2023. It has since softened slightly, last standing at $14.513/MMBtu, on 26 November.

A combination of factors including the onset of colder weather in Europe and correspondingly faster-than-usual drawdown of gas stocks, as well as prospects of reduced Russian gas supply into the region amid ongoing geopolitical tensions, have driven the gains in the TTF, which had across several days in November stood at a premium over the JKM — a generally uncommon phenomenon. The closing of the arbitrage – the more lucrative netbacks associated with delivering to Europe – had incentivised several sellers to divert to Europe their US cargoes originally destined for Asia.

Weak Asian demand, high inventories limit upside

But curtailed LNG production in the Pacific and limited US flows to Asia have not substantially shrunk the spot supply pool, with cargoes continuing to be offered to Asia from other projects in Australia, Southeast Asia and the Middle East.

Importantly, demand for cargoes among Asian end-users has generally been tepid, with higher-than-usual temperatures in October and first-half November across most of Northeast Asia having limited LNG consumption for heating and keeping inventories high for many buyers. Some have deferred, diverted, and even sold, cargoes in order to manage brimming inventories and prevent tanktops.

While several buyers from Japan, Taiwan and South Korea have in recent weeks emerged to buy spot cargoes for deliveries from December to February, the volumes sought and purchased have not been in a magnitude capable of soaking up available supplies and substantially tightening the market, thus limiting the upside in prices.

Weather key to driving incremental demand

And while Asian buyers are expected to emerge for spot cargoes for deliveries in January and February as part of regular winter restocking, a sustained period of frigid weather that will substantially boost LNG consumption and draw down LNG inventories is what will likely lead to substantial incremental demand for the fuel and push prices into the $20s/MMBtu and beyond (apart from unplanned supply outages).

There is no strong market consensus on weather conditions in the coming months, with forecasts by official national meteorological agencies sometimes failing to materialise or turning out to be completely erroneous. But they serve as a guide to market participants, especially buyers, when assessing and planning their inventories.

The Japan Meteorological Agency (JMA) is generally forecasting a warmer-than-usual December, an average to colder-than-usual January, and an average to warmer-than-usual February. Specifically, it predicted in its 19 November forecast a 40% chance of above-normal temperatures (versus 30% chance of below-normal and 30% chance of normal temperatures) in December; 30-40% chance of below-normal temperatures (versus 30-40% chance of normal and 30% chance of above-normal temperatures) in January; and 30-40% chance of above-normal temperatures (versus 30-40% chance of normal and 30% chance of below-normal temperatures) in February.

And the Korea Meteorological Administration (KMA) is generally predicting an average December and January, and a warmer-than-usual February. Specifically, it predicted on 22 November a 50% chance of normal temperatures both in December and January, versus a 30% chance in December and 20% chance in January of below-normal temperatures. And it predicted a 50% chance of above-normal temperatures in February, versus a 20% chance of below-normal temperatures and 30% chance of normal temperatures in the same month.

By Joey Chua, LNG Market Analyst, SSY