LNG price respite

The energy commodity prices have come full circle. RLNG spot prices in the oft-quoted Japan-Korea Marker (JKM) market have nosedived to almost a third from a year ago. That in Asian markets is even lower, with the spot market transactions taking place at and around $9/mmbtu – lowest for the winter season in years, and already a seven-month low.

In just ten weeks, the JKM Platts Future LNG price has almost halved from $18.5/mmbtu in the last week of October 2023. The biggest respite comes from temperatures higher than usual in the peak winter demand season across the North Asian market – that is the biggest LNG market in the world. Even European LNG prices have come down considerably, as temperatures are expected to increase sooner than usual.

Big buyers in developed markets are reportedly sitting on comfortable inventory levels, fearing the worst that never came. For context, gas inventories in EU countries are at 85 percent capacity, up 20 percent from the 5-year average, according to Gas Infrastructure Europe. Such is the comfort with LNG inventories that even a disruption as big as the one in the Red Sea, has not attracted any sizeable risk premiums. There are no last-minute cancellations and diversions of vessels to European buyers, like the last few winter seasons. The industrial slowdown in Europe and a few Far East countries has also contributed significantly to muted demand growth, helping ease prices.

The spot market is buzzing with activity as the single-digit price offers the developing and emerging markets to step in. The slide offers the likes of Pakistan a great opportunity to be in the spot market again, having accepted a rather expensive bid at $18/mmbtu for January delivery. Interestingly, the Pakistan LNG Limited (PLL) has canceled its advertised tender for January 18, 2024 delivery. It remains to be seen if a fresh tender will be issued to take full advantage of reduced spot market rates before the demand fades.

Mind you, industrial demand in Pakistan has also gone down, and domestic off-take starts to ease from February onwards – often meaning that Pakistan’s existing long-term supply arrangements are enough to meet the demand. Although the foreign exchange reserves have improved from the depths seen late last year, Pakistan’s worries on external payment are far from over.

The relative respite should be used as a timely opportunity to finally implement the Weighted Average Cost of Gas Bill. As domestic consumption sits atop the priority list, and most LNG gets diverted for residential use in the winter season, the cross-subsidy remains high, despite a mammoth price revision in piped natural gas tariffs for all categories. The inefficiencies at the distribution levels continue to add around $2-3/mmbtu, which is an area that needs immediate attention – or else the gas sector arrears will continue to rise.