In Port News 09/04/2015
Lower LNG prices and a lack of appetite for Henry Hub-indexed contracts in Asia are unlikely to derail the trading hub ambitions of key players such as Singapore and Tokyo, energy consultancy Wood Mackenzie has suggested.
The dramatic decline in oil and LNG prices over the past six months has added a new twist to the Asian LNG market, with Henry Hub-indexed LNG no longer priced at a discount to oil-indexed LNG. This has led to some speculation over the need to break away from the long-term oil-linked deals traditionally favoured by Asian buyers.
However, some analysts have brushed this aside, saying the impetus for developing trading hubs in Asia is unlikely to be disrupted by the current pricing situation.
“The fall in spot and long-term contracted prices won’t have a severe impact on the LNG trading hub ambitions in Singapore and Tokyo,” Chong Zhi Xin, principal analyst for Asian gas and power with Wood Mackenzie, told reporters during a media briefing on Wednesday.
“These concepts are still quite far away, and the regulations that will be developing in these places over time are what will really have an impact on whether these trading hubs are successful or not,” he added.
Not only are changing market dynamics not expected to hamper trade development, but substantial new volumes of LNG flowing into Asia – together with greater pricing volatility – could in fact allow hubs to flourish.
Wood Mackenzie expects more than 100 mtpa of new LNG supply from Australia and the United States to be brought to market over the next five-to-six years, which will help provide the liquidity needed to establish effective trading hubs.
“The supply we expect to be coming from Australia and the US will provide a lot of liquidity in Asia, and that will naturally lead to a trading hub being developed in the region as more traders seek to optimise their cargoes,” Chong said.
Pricing volatility stemming from the needs of some of the region’s established and emerging LNG buyers is also likely to play an important role.
“When we look at the price element, the most important thing is the volatility we expect over the next few years. There will be more seasonal demand coming out of China as well as Northeast Asia, and traders will be looking to optimise their cargoes as well as find opportunities for trades,” Chong said.
Spot trade
The development of Asian trading hubs is also likely to be supported by an increasing shift towards spot trading.
Although both spot and LNG prices have tumbled over the past six months, spot prices are forecast to remain lower in the coming years, while the gap between the two will be wider than in 2014.
Spot LNG in East Asia is projected to be priced at a 38% discount to contracted LNG in 2015 and a 28% discount in 2016, up from a 15% difference in 2014, according to a report from Goldman Sachs last month.
“The growing bifurcation between spot and contract prices should encourage buyers to become more assertive and turn their backs on the renewal of long-term contracts,” analysts with the bank said.
While security of supply concerns mean long-term contracting is unlikely to stop altogether, Goldman Sachs believes as much as a quarter of LNG trading could occur on a spot basis by the early 2020s, up from less than 10% at present.
Hub plans
The high cost of oil-indexed LNG in Asia over the past few years and a significant price differential with cheap North American gas has sparked interest in the development of hubs in the region to encourage spot trading, promote price discovery and allow for alternative pricing and delivery terms.
Singapore and Tokyo are seen as the two likeliest candidates for an Asian LNG trading hub, and discussions in both markets are already well advanced.
Japan launched an OTC LNG futures market in September that offers monthly non-deliverable forward LNG contracts, with a daily settlement price based on the three-day average of Japan’s delivered ex-ship price.
In Singapore, Pavilion Energy – the energy development arm of the state’s sovereign wealth fund Temasek – is working with Singapore’s stock exchange, government agencies and other industry players on developing an LNG price marker based on trades carried out in the city.
