JKM drop triggers fear of abundant spring LNG deliveries to Europe
Asian storage demand expected to cushion as stock fell below 3-year average
But summer arbitrage opportunities to Europe already narrowing
London — A sudden drop in gas prices at the Asian JKM hub prompted many European traders to question whether LNG cargoes will still be attracted toward Asian markets during the spring and summer periods or rather be diverted to European ports. But while Asia's need to replenish its storage facilities may cancel out traders' fears of a LNG summer flooding in Europe, a steep backwardation in Europe's gas prices seems to suggest that LNG cargoes will be encouraged to stay in the Atlantic.
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While Europe's spring and summer contracts are currently more attractive than the JKM equivalent, market players believe that the need for Asian countries to refill storage sites which fast depleted during the period of price spikes may keep some LNG cargoes in Asian waters, market players said. And this would result in average numbers of LNG cargoes coming to Europe over the spring and summer period.
Storage demand in Asia
While specific data on inventories in Asia is difficult to obtain, and mostly available only on a lagged basis, the strong levels of demand in Asia over recent weeks suggests local storage facilities will be in dire need of being replenished.
"The colder-than-normal temperatures to start the new year likely pulled on stocks further," senior energy analyst at S&P Global Platts Analytics Jeffrey Moore said. "We estimate that Japanese and Korean combined stocks exited December at 9.4 Bcm, nearly 21% below year-ago levels."
While 9.4 Bcm is below the three-year average, it is still higher than the 5.7 Bcm seen in January 2018, according to Moore.
"The currently low stocks will create some additional demand to refill, and likely in Q2," Moore said.
Contrary to Europe, Asian countries store LNG directly without regasifying it first. This means that a period of lower-than-normal LNG consumption is needed to have storage injections, and rising temperatures in the second quarter would allow such a scenario.
Steep backwardation
However, as the JKM rolls into March deliveries, a steep backwardation is forming on the curve, which narrows the arbitrage to Europe, potentially keeping volumes in the Atlantic basin.
On Jan. 11, a few days before the JKM for the February headline month hit an all-time high, the spread between February and March assessments was in backwardation to the tune of $15.867/MMBtu, with March assessed at $15.867/MMBtu and February at $28.221/MMBtu. By the time the JKM for February was assessed at $32.50/MMBtu on Jan. 13, March deliveries were being assessed at $15.075/MMBtu, a backwardation of $17.425/MMBtu. The wide February/March spread remained in place until the end of the week as JKM levels came off by Jan. 15. The JKM for February was assessed at $26.990/MMBtu, while March also weakened to $9.826/MMBtu.
With March becoming the headline month for JKM by Jan. 16, that fully manifests, with JKM closing at $9.626/MMBtu. With LNG cargoes delivered into Northwest Europe in H1 March last assessed by S&P Global Platts at $7.016/MMBtu, shorter journey times to Europe from production locations like the US Gulf and West Africa could become more attractive to sellers.
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January 19, 2021 at 12:45AM
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Asian storage demand in spotlight as traders fear flood of LNG in summer - S&P Global
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