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Worries for LNG as prices slip amid record North Asia imports

Launceston, Australia

THE spot price of liquefied natural gas (LNG) in Asia has completely missed its usual winter peak, with much of the blame being laid at the door of milder-than-usual temperatures trimming demand.

That sounds perfectly plausible, but doesn't quite tally with the fact that delivered volumes into the major consuming region of North-east Asia hit a record-high in December.

A total of 20.25 million tonnes of the super-chilled fuel were delivered in December to the region, which includes the top three consumers of Japan, China and South Korea, according to vessel-tracking and port data compiled by Refinitiv.

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This was up 12.4 per cent from the same month in 2017, adding to a 14 per cent gain in shipments in November 2018, from the same month a year earlier. It was also the most on record, eclipsing the 19.46 million tonnes from January 2018.

China was the main driver of the jump in imports, with 6.42 million tonnes arriving in December, up 27 per cent from the same month in 2017. Top consumer Japan saw imports weaken, dropping by 9 per cent to 7.72 million tonnes in December, while No. 3 South Korea recorded an 11 per cent increase to 4.81 million tonnes.

The shipping data does show that LNG demand was strong for the first part of the northern winter, but it doesn't yet give a picture of how the rest of the cold season will play out. It's here that the spot pricing comes into play, and this is pointing to a weak back-end of winter.

The spot price for cargoes delivered to Asia LNG-AS was US$8.50 per million British thermal units (mmBtu) in the week ended Jan 11.

It has been trending down since a minor early winter peak of US$10.90 per mmBtu in the week to Nov 16, and is well below the summer-high of US$11.60, reached in the week to June 15. The spot price is usually for deliveries of around four to eight weeks in advance, so the current price reflects cargoes that will arrive in February.

It's worth noting that the US$10.90 reached in mid-November reflected cargoes delivered in December, when demand reached an all-time high in North-east Asia.

The fact that even this strong demand couldn't spark a sustained rally in prices shows that it's more likely ample supply is playing a greater role than demand.

This view is supported by spot prices for March delivery, at around US$8.30 per mmBtu, being weaker than those for February.

There is usually a sharp drop in spot LNG prices as winter ends and the market enters the lower-demand shoulder season of spring, and the strength of any summer recovery is largely dependent on how hot the weather is, as this drives power demand for air-conditioning. The fact that the winter rally in LNG prices didn't materialise, even in the face of solid demand growth, raises the possibility of a weaker-than-usual first-half.

The market narrative of LNG has swung in recent months from one of an expected oversupply on the back of a raft of new projects mainly in Australia and the United States, to a consensus that strong demand growth in Asia will lead to a deficit in coming years, unless new ventures are sanctioned.

However, while this view may well be correct from a longer-term perspective, it doesn't preclude the possibility of short to medium-term periods where supply exceeds demand. This may be the situation for the next few months as the spot market struggles to absorb the extra supply from projects that came online in 2018.

While the longer-term outlook for LNG demand growth appears to be rosy once again, the market may have little bouts of indigestion every now and again, as it has to absorb the lumpy nature of supply additions. REUTERS