Rebound in oil prices widens gap between spot LNG and oil-linked gas contracts

Friday, 01 June 2018

“It is not clear whether such price gaps will remain going forward, but depending on how the situation develops, the gaps could lead to a revision of long-term contract prices and expansion of the spot market,” said Yoshikazu Kobayashi, a Senior Economist at the Institute for Energy Economics in Japan (IEEJ).

Unilaterally, the U.S. President Donald Trump is pushing through the reinstatement of sanctions against Iran, limiting the country’s oil export which creates a shortage on global market and uncertainty on how OPEC might fill that gap in supply. A rebound in global oil prices, and a subsequent rise in oil-indexed gas prices is the consequence while prices LNG linked to the U.S. Henry Hub remain comparatively cheap and attractive to buyers.

Concerns about rising price discrepancy

The spot LNG market of Northeast Asia has fallen to the lower end of $7/mmBtu while oil prices continue to rise, according to IEEJ figures. Going forward, Japanese importers are vary that their longterm LNG import contracts will cost them more dearly as higher-prices oil is being factored in – just at the time of peak gas demand during the summer season.

Sellers into the spot LNG market, notably from the United States might well see the attractiveness of their cargoes increase amid a growing price disparity between spot, shortterm and longterm offtake.

Portfolio players such as Shell and the likes of Vitol, Trafigura and Guvnor are increasingly trying to position themselves for selling more US LNG into growing markets in Northeast Asia.

The elephant in the room remains China, which took analysts by surprise last year when its LNG imports surged. Far from being a one-off hike, China's demand now appears to “remain robust”, given that it imported around 12.7 million tonnes of LNG in January-March this year, up an astonishing 63% year-on-year.

“Initially, China's LNG imports were expected to be calmer this year than last year. However, as the January-March levels show, the country's demand is robust and increasing,” Mr. Kobayashi commented in the latest IEEJ report on global oil and gas pricing.

Although Cheniere’s unique business model is doing well exporting limited amounts of LNG to China, overall, the United States has not played a major role in China’s supply chain because U.S. LNG is generally not cost competitive in China.

In 2017, China paid an average $8.65 per thousand cubic feet for imports from the United States and an average $6.95 per thousand cubic feet for all other natural gas imports. Based on 2017 pricing, U.S. imports are more expensive than 83.6% of the natural gas China obtained from other suppliers. Within China’s seaborne LNG supply chain alone – not including pipeline gas – U.S. imports are more expensive than 73.8% of China’s imports from other suppliers.