PIRA: Asian average LNG spot prices at a sustainable low

NYC-based PIRA Energy Group reports that weighted average LNG spot prices in Asia are at sustained low for the first time since the recession in 2009.

The last time weighted average LNG spot prices in Asia dropped below $10/MMBtu for a sustained period was in the teeth of the recession in 2009. At that point, demand had collapsed and Fukushima had not yet happened. The current situation could not be more different, as economic growth is strengthening, crude prices are dropping, and Japan is still without nuclear power. The key to this group is the falling price of crude, which is pushing down the ceiling on contract gas prices.

Last week’s EIA-reported 64 BCF storage draw was on the cusp of a second straight bullish update relative to a low 60s “consensus.” The draw confirmed structurally improving gas demand in the power sector. But the draw was only a small fraction of the year-ago pull (256 BCF) and five-year average (157 BCF), owing to much higher year-on-year production and the year-on-year reversal of R/C heating loads (from unusually high to severely depressed).

PIRA believes that steady declines in spot prices in Europe will continue to emerge in the weeks to come. Weather does not look like it is going to rescue the demand for the balance of the month despite the previous considerable warnings from well-respected weather forecasters. PIRA added that it is still somewhat surprised that NBP is as strong as it is on a prompt basis, but reduced Russian nominations and lower Dutch production have played a critical role in balancing the increase in LNG imports in the north and south of the Continent.

New information was released ahead of the planned start of the mandatory Korean cap-and-trade system in January 2015, which brings an explicit price on carbon emissions to a major Asian economy. The government’s reference price will play a crucial role in guiding this market, with trading limits also important. Declining LNG prices lower the expected range of “implied CO2 prices” that would incentivize power sector fuel switching, although these remain well above reference price levels.

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Press Release; Image: Tepco