Page 4 - AsiaElec Week 48

AsiaElec COMMENTARY AsiaElec
Asian utilities face oversupply in gas market
ASIA
WHAT:
Pavilion Energy has cancelled the loading of a cargo from Cameron LNG, but will still reportedly pay for it
WHY:
An oversupplied market is leaving traders unable to resell purchased cargoes
WHAT NEXT:
Current market pressures will likely spur buyers
to push for even more flexibility in how they purchase LNG
THE flood of new supply onto global markets amid slowing demand is increasingly weighing on the LNG industry. On November 19, Reuters reported that Singapore’s Pavilion Energy had cancelled the loading of an LNG cargo from the Cameron LNG terminal in Louisiana, on the US Gulf Coast. The move is an unusual one, having come about in an oversupplied market in which traders are finding themselves unable to resell cargoes they have purchased.
Gas importer and marketer Pavilion has a long-term supply agreement with Japan’s Mit- subishi to buy LNG from the Cameron facility, which is operated by Sempra Energy. Industry sources told Reuters that Pavilion had still agreed to pay for the cargo that it declined to load.
“Pavilion Energy evaluated scheduling and other commercial matters, then took the deci- sion not to lift the cargo in full co-ordination with the supplier,” a Pavilion spokeswoman told Reuters.
And the news service cited traders as saying that other buyers of US LNG are also considering not loading their cargoes while still paying for them, those these reports remain unconfirmed as yet. However, for those buyers with take-orpay agreements in place, this may end up being the best option during a period of market oversup- ply and low LNG prices.
Oversupply
Cameron LNG is one of four new US LNG export terminals to start production this year, three of which are located on the Gulf Coast. A fifth train was also brought online at Sabine Pass – the first export project in the Lower 48 US states. Coupled with new LNG export capacity starting up in Australia, this has led to a glut of LNG supply that has put downward pressure on prices for the fuel.
Asian spot prices for LNG fell for the fourth consecutive week last week, with traders warn- ing of further declines exacerbated by oversup- ply, full inventories and mild weather.
The average LNG price for December deliv- ery into north-east Asia was estimated at $5.40 per million British thermal units ($149.36 per 1,000 cubic metres). While prices for delivery in January are higher, according to market sources cited by Reuters last week, at $5.90 per mmBtu ($163.19 per 1,000 cubic metres), this trend still means spot prices are at almost half the levels they were at a year ago. Indeed, the January deliv- ery price marks a record seasonal low, according to Refinitiv data.
The situation is no better in Europe, where LNG for December delivery at the Dutch gas hub has been trading at slightly below $5 per mmBtu ($138.30 per 1,000 cubic metres) this
week, down roughly 45% year on year. And European storage is unusually full, preventing traders from shipping excess cargoes to Europe like they have tended to do in an oversupplied market previously.
The situation is exacerbated by forecasts of mild – and even unusually warm – winter weather across Asia, including for leading LNG importers Japan and China.
“Clearly there is no buying demand on the market. All inventories across the world are high, production is strong and the weather seems to be very mild,” an LNG trader told Reuters last week.
What next
LNG trade is still taking place, but there are con- cerns that Pavilion’s move to cancel the loading of a cargo could be the first of several such deci- sions. And this does not bode well for new supply due to enter the market in the coming months as yet more trains start up in the US and elsewhere.
And longer-term trends are contributing to bearish sentiments about the LNG market’s potential. Both Europe and China are due to receive more gas via pipeline, even though China is still set to become the biggest LNG importer in the world in the coming years. Meanwhile, Japanese efforts to restart nuclear reactors are also anticipated to lead to the coun- try’s LNG imports being displaced, though the plans have been beset by delays on safety con- cerns and local opposition.
Nonetheless, these trends suggest that LNG sellers will increasingly have to look beyond East Asia to sell additional cargoes. South and SouthEast Asia are expected to buy more LNG, and this is where sellers could turn at least some of their attention, even as East Asia continues to absorb the bulk of supply.
A cold winter could also provide a boost to the industry – though this is currently not forecast.
And for those buyers opting to cancel the loading of certain cargoes, especially if they are still obliged to pay for them – such moves could contribute to a shift away from long-term contracts underpinned by take-or-pay require- ments. Buyers are already pushing for more flexibility in how they purchase LNG. Having to cancel cargoes in an oversupplied market could spur this further.™
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w w w . N E W S B A S E . c o m Week 48 04•December•2019