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Asia’s Winter LNG Supply Crisis: Will There Be Enough to Keep the Cold at Bay?

Winter Supply Woes: Asia’s LNG Dilemma Deepens

by BurrowBoss October 2, 2023, 10:52 am 2k Views

Asia Winter LNG Supply

Asia's Winter LNG Supply Crisis: Will There Be Enough to Keep the Cold at Bay?

Asia Winter LNG Supply faces unprecedented challenges as inter-basin trade restrictions and high demand threaten to disrupt the region's energy security.

Asia's Winter LNG Supply Faces Unprecedented Challenges Amid Closed Arbitrage Windows and Supply Concerns

In the ever-evolving landscape of global energy markets, Asia's winter liquefied natural gas (LNG) supply is encountering a perfect storm of challenges. The closure of arbitrage windows between the United States and Asia, as well as Africa and Asia since April, has cast a shadow over the region's energy security. As we delve into the intricacies of this situation, it becomes apparent that Asia's energy landscape is undergoing a seismic shift.

The negative price arbitrage for Atlantic LNG cargoes into Asia has been a dominant factor shaping the market dynamics. Since April, inter-basin trade restrictions have hindered the smooth flow of LNG, making it increasingly difficult for Asian consumers to access spot supply, just as the winter season approaches. The ramifications of this trend could be severe, potentially leaving Asia vulnerable to supply shortages should unforeseen circumstances like a cold snap or production issues arise.

A key driver behind this restricted trade lies in the high freight rates that suppliers are contending with. Moreover, increased terminal capacity in Europe has incentivized suppliers to direct their LNG cargoes towards European terminals, further limiting the availability of LNG in the Asian market. The fear of disruptions to Panama Canal transits during the winter months has also weighed on the minds of market participants, contributing to their reluctance to divert LNG cargoes to Asia.

This phenomenon is best encapsulated by the words of an anonymous Asian source, who remarked, “[We are] less likely to see US and African cargoes coming into Asia this year during the winter season as freight rates remain high.” These high freight rates have undoubtedly reshaped the LNG supply landscape, forcing market participants to reevaluate their strategies.

The third quarter of this year has not been without its supply uncertainties, primarily driven by incidents such as the industrial action at Chevron's LNG facilities in Western Australia. These events have exerted upward pressure on Asian LNG prices, with Platts JKM, the benchmark price for LNG delivered to Northeast Asia, reflecting this price surge. The average JKM price for Q3 reached $12.52/MMBtu, compared to $10.90/MMBtu in Q2, according to S&P Global Commodity Insights data. While recent market sentiment has hinted at supply stability during the shoulder months, the market situation is anticipated to tighten as winter demand looms on the horizon.

A Japanese source highlighted the impending challenge, stating, “Demand for spot cargoes in winter is likely to be stronger than supply.” This assertion underscores the precarious balance that must be maintained to ensure a stable energy supply during the winter season.

Moreover, the closure of Asian arbitrages and the relatively wide intermonth contango in LNG prices have driven traders to explore alternative solutions. One such solution is the development of floating LNG storage. The current level of floating storage in September is poised to surpass the levels observed in May when the arbitrage window was marginally open. However, despite the potential benefits, Atlantic traders anticipate less willingness among sellers from the US and Africa to float volumes due to robust prompt prices and elevated storage levels in Europe.

As of September 28, the total volume of LNG in floating storage globally stood at 2.6 million mt, indicating the growing interest in this storage method as a means to navigate the turbulent waters of LNG supply.

The upcoming winter season in Asia is further complicated by the unpredictability of temperatures. As the region grapples with a limited pool of LNG cargoes, market experts are keeping a close eye on temperature trends. A more extreme winter could necessitate increased procurement of spot cargoes to meet the heightened demand for heating and energy.

On a brighter note, there is optimism that cargoes from the US and Africa may flow into Asia during the winter season. The Chinese source's perspective sheds light on this glimmer of hope, stating that active participation in the spot market by Asian buyers could ease supply tightness. “Buyers [in Asia] will pay a good spread to sellers, while Europe's demand remains weak,” the source commented. This suggests that a dynamic shift in LNG dynamics may be on the horizon, driven by market forces seeking equilibrium.

However, the Asia-Europe arbitrage for Atlantic volume remains firmly shut, with spreads and conditions not yet conducive to fostering arbitrage opportunities. The East-West spread for November hovers at only around 50 cents/MMBtu, raising questions about the feasibility of diverting cargoes to Asia. Some companies have opted to send cargoes to Europe rather than Asia in recent quarters, further exacerbating Asia's supply challenges.

In terms of import volumes, the numbers paint a stark picture. As of September 29, the total imported volume in Q2 and Q3 from the US in Europe significantly surpassed that of Asia. Similarly, cargoes from African sources have predominantly flowed into Europe rather than Asia, reflecting the prevailing market conditions.

The dearth of arbitrage opportunities for bilateral spot trade has also manifested in the physical Platts Market on Close assessment process. Comparing Q3 data for this year to Q3 2021, we observe a notable decline in the number of US base load port nominations in offers. The closure of the US-Asian arbitrage window has clearly left its mark on the market dynamics.

It is important to note that not all arbitrage windows have been shuttered. The Middle East-Asia and Australia-Asia arbitrage windows have remained open throughout the year, with the majority of export volumes flowing into Asia rather than Europe. This highlights the evolving dynamics of regional energy trade, emphasizing the need for a diversified supply strategy.

While the arbitrage window between the Atlantic basin and the Far East remains closed, some market sources have observed attempts to send cargoes from the Atlantic basin to the Far East. This intriguing development raises questions about the motivations behind these maneuvers. Could it be that sellers are exploring opportunistic buyers, or is there a genuine demand that needs to be met? The answer to this riddle remains to be seen.

In conclusion, Asia's winter LNG supply is navigating through challenging waters, with closed arbitrage windows, supply uncertainties, and temperature fluctuations complicating the landscape. While challenges abound, the market is not devoid of opportunities. As we move into the winter season, the dynamics of LNG supply in Asia will continue to evolve, shaped by the forces of demand, supply, and market sentiment. It is a landscape that promises excitement and uncertainty in equal measure, keeping market participants and observers on their toes.

Asia's Winter LNG Supply Crisis: Will There Be Enough to Keep the Cold at Bay?

As winter approaches and the demand for LNG supply in Asia tightens, it becomes increasingly crucial to address the challenges and uncertainties surrounding the region's energy security. The closed arbitrage windows and price fluctuations have left Asia facing a limited pool of resources to meet its winter heating needs. In this dynamic and uncertain landscape, we understand the importance of securing not just your energy supply but also your comfort during the colder months.

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