Managing Editor, Americas LNG
S&P Global Platts
16:00 - 16:25
Thursday, 19 September 2019
S1.10 2018 / 2019 Pricing Increasingly Supports Pricing LNG Against its Own Fundamentals
NOTE: The below abstract includes data up to January 1 2019. The paper presented at Gastech in September 2019 will be based on the same themes but updated to also include pricing data, with related insights and charts, from January 2019 until August 2019.
2018 LNG pricing confounded expectations, re-emphasizing risks of pricing Asian LNG against other commodities and facilitating increasing adoption of market-based LNG pricing.
- Asian LNG spot prices de-correlated from other LNG pricing indexations despite flexible US LNG supply ramping-up
Expectations of strong LNG pricing correlations, as US LNG further ramped-up, proved misguided in 2018. Asia LNG spot price correlations against typical “Brent-linked” and “Henry Hub-linked” LNG contracts as well as NBP, all fell sharply. Reasons for the lower correlations included ramping up US and Australian liquefaction trains suppressing Asian prices in Q1, while Brent stabilized with OPEC production discipline.
Asian LNG spot price correlations with “Henry Hub-linked” LNG contracts were especially hampered by Henry Hub’s unexpected Q4 price surge, underpinned by a particularly cold winter. In addition, soaring LNG charter rates post-summer, as shipping journeys lengthened with US LNG deliveries into Asia, increased US LNG’s DES costs, while Asia LNG spot prices declined.
- Asian LNG spot prices strengthened despite the supply growth
2018’s relative Asia LNG spot price strength reduced its discount to the average typical “Brent-linked” LNG contract price by almost 50%, in absolute terms, year-on-year. By contrast, Asian LNG spot price’s 2018 absolute premium over NBP grew by nearly 50% year-on-year. Whereas Asian LNG spot prices were at a discount to typical “Henry Hub-linked” LNG contract pricing in 2016 and 2017, this reversed last year, as Asian LNG prices averaged over US$1/mmbtu above historical “Henry Hub-linked” LNG contract pricing.
- Asian LNG spot pricing seasonality flattened despite continued strength of seasonal LNG markets
Sharply declining Q2 global LNG supply, combined with proactive north Asian buying ahead of winter, facilitated by growing Chinese LNG/gas storage capacity, reduced 2018’s Asian LNG spot price seasonality. LNG production then ramped-up aggressively during the November and December higher demand months, contributing to an uncharacteristic Asian spot LNG price decline in late-2018.
Increasingly flexible LNG marketing accelerates commoditization over the medium-term
2018 pricing analysis revealed the LNG market’s unpredictability, primarily driven by LNG-specific influences, and Asian LNG spot prices’ de-coupling from other commodity prices. This increases counterparty risks of non-LNG priced contracts.
This was publicly illustrated by Tellurian’s 15-year agreement with Vitol, announced in December, for the supply of 1.5 mmtpa of Asian-spot-priced LNG. In addition, three of the four liquefaction projects, accounting for over 80% of the volumes, taking FID in 2017/2018 were underpinned by portfolio supplies. These supplies, from Canadian and African projects, are usually flexibly marketed by a portfolio offtaker, who is free to sell the volumes at LNG market prices, with no fixed destination, when volumes ramp-up. This provides further medium-term catalysts for LNG’s commoditization, increasingly ensuring LNG is priced against its own fundamentals.