Continued LNG volatility could keep Singapore electricity, power generation prices high

THE latest bout of volatility in the liquified natural gas (LNG) market is coming from a war of sorts between Europe and Asia. Market watchers noted that Europe is now pricing itself as the "premium market" in order to attract supply, while anything left over is re-routed to Asia.

This situation has been going on for some time. According to S&P Global Platts Analytics, the Japan-Korea Marker's (JKM) daily physical assessment spent the majority of January priced below the Dutch TTF month-ahead contract. This is "a true rarity", the research group said.

Asia traditionally needs to price higher than Europe given the net-short position in the region, as consumption outweighs supply.

"The flip of Europe becoming the premium LNG market means that spot LNG prices are expected to stay elevated until the European gas market comes back into balance," said Jeffrey Moore, Asian LNG analyst at Platts.

A more competitive Europe now means Asia-Pacific demand growth in 2022 is expected to be depressed as high prices result in industrial demand destruction and fuel switching in the region.

Robert Sims, head of Wood Mackenzie's LNG short-term research, said European utilities have an advantage as they have a "large, freely traded and very liquid domestic gas market".

"As TTF prices increased, European utilities were able to purchase highly priced LNG cargoes on the international spot market and then sell the re-gassed LNG back into that market without making losses," he noted.

"By contrast, most Asian countries do not have access to the same types of domestic gas markets; and due to regulated prices, passing through the cost of expensive LNG cargoes can become an issue."

Europe also has the advantage of being physically closer to two of the largest suppliers of LNG - Qatar and the United States - which cuts shipping costs compared with North-east Asia.

What does this conundrum mean for Singapore, which is highly dependent on LNG imports as an energy source?

A gas shortage in Central Europe could have a direct impact of raising prices "halfway across the world" in Singapore, which could jack up the overall cost of power generation, said Sims.

Higher spot-LNG prices will also keep electricity prices elevated, he warned, although he added that a majority of the Republic's LNG imports are linked to Brent oil or Henry Hub gas through long term contracts.

Xi Nan, vice president and gas markets analyst at Rystad, said higher fuel and gas prices have been the main driver of high electricity prices globally. "If the LNG price stays high, so will electricity prices," she said.

"Striking volume under term contracts is a wise choice for Singapore utilities," she added.

For broader Asia, Platt's Moore said end users in the region will see a continuation of the turn down of downstream demand from industries which cannot run at high prices.

"The main areas where we are seeing this occur are in China and India, especially in the industrial and refining sectors," he said.

Singapore could be more buffered because it falls under the category of end users that are less affected by the current market environment, as they are largely covered by long-term contracts which are priced off other commodities such as oil.

"Unless there is an unexpected uptick in demand or disruption in another form of supply such as pipeline imports, they are unlikely to need to go out and purchase a significant number of spot LNG cargoes," he added.

For now, traders should brace themselves for more volatility in the spot-LNG market. Wood Mackenzie's Sims said LNG demand across Asia-Pacific remains strong, and in the past has proved quite resilient to high prices.

"Our view is that Asian LNG prices will need to continue pricing at a premium against Atlantic LNG buyers, including from Europe, for the foreseeable future.

"However, recent events over the last 6 months show that European gas prices play a key role in determining the absolute price that LNG is traded at, and also adds volatility to those prices."