Asian LNG rally seen as fragile since demand weakness persists

SINGAPORE: A recent jump in Asian liquefied natural gas spot prices isn’t expected to last.

The Japan/Korea Marker benchmark has risen 34% since late April on prospects of global supply curbs from the US to Malaysia, opportunistic buying from smaller Asian players and the start of the summer season, when demand for air conditioning lifts consumption.

However, sentiment is still fundamentally bearish, according to nine traders surveyed by Bloomberg, after the Covid-19 outbreak slashed demand and left importers with brimming stockpiles.

The pandemic, coupled with milder winter weather and the start of new export terminals, pushed the region’s spot price to a record low last month, making some projects unprofitable.

While the world’s biggest buyers of the fuel – Japan, China and South Korea – are in different stages of reopening their economies, which could translate into more gas consumption, some traders fear that a broader global economic slowdown could still crimp demand in those nations.

Some traders said that a few suppliers may be holding back on offering cargoes for June and July delivery in the hope that prices increase further.

Meanwhile, offers and bids have dried up on S&P Global Platts JKM LNG Market on Close as traders reassess their position.

To make matters worse, European gas inventories are expected to hit maximum capacity as early as July, which could throw the region’s price benchmarks below zero as buyers struggle to find a place to store the fuel.

JKM has been closely tracking Dutch and UK indexes, and any drop in spot prices would likely be mimicked in Asia, albeit to a smaller degree, some of the traders said.

The prospect of dwindling storage space and lacklustre demand should, theoretically, lead to suppliers curbing output, but most of the traders said they aren’t convinced the market would be that efficient.

“Shutting a terminal would be considered the absolute last resort for a cash-strapped LNG producer, and is a move that would only be undertaken if prices are not expected to become profitable for a long period,” Rystad analysts said in a note emailed Wednesday.

“The obvious drawback of restarting an LNG plant is that the commissioning of the facility is highly complex.”

Buyers of US LNG may have cancelled more than 30 cargoes loading in June, but that doesn’t necessarily mean producers will shut in that supply, traders noted. While the volume of gas being supplied to US.

LNG export terminals have slipped recently, this has not translated to a visible drop in exports, Goldman Sachs analysts including Samantha Dart said in a note dated May 13.

At its current pace, global output for May could rise to 29.4 million tons compared with 28.9 million tons in April, according to Bloomberg calculations based on ship-tracking data.

While a few new tenders from India, including from Gujarat State Petroleum Corp, suggest demand might return as the government moves to lift a nationwide lockdown, the country’s buyers often float tenders to test market prices and don’t end up awarding them.

As well, one trader in the country warned that there hasn’t been a noticeable jump in consumption, expecting instead a gradual climb.