PIRA: how low will Asian spot LNG price fall?

NYC-based PIRA Energy Group reports that with crude prices collapsing during the past six months, a considerable amount of debate has emerged over how long it would take for Asian contract prices to fall as well. 

The truth is that most contracts, based off of the average import price for Japanese crude oil (JCC), use between a one and four month lag. By no means is there a singular contract price, PIRA said in its weekly report. Making this assessment is important because it sheds light on how heavily Atlantic Basin spot cargoes will need to be discounted in order to keep LNG production from shutting in, which no producer wants to do. If Atlantic Basin flows to Asia are to remain as high as they were through January, it’s going to take some low prices to move volume in the second quarter, which is the seasonal nadir for Asian gas demand. It will be critical to discount spot LNG in the months and quarters ahead in order to keep crude, NGL, or condensate flowing.

In the U.S. the EIA’s penultimate storage update for the 2014-2015 heating season revealed a 12 BCF injection. The range of estimates defining the market was quite large with expectations stretching from a single-digit draw to injections above 20 BCF. In spite of the benign “miss” versus consensus estimates, the market took the prompt contract down ~5¢, to settle at ~$2.67 — its lowest level since early March. That bearish response could indicate that lower prices are in the offing given the material amount of coal-to-gas switching needed in April/May, PIRA believes.

While possessing the second most amount of gas demand, the U.K. has the smallest amount of storage cover of any of the major gas consuming countries in Europe. So any time something happens in U.K. storage, it can tend to have an outsized effect given the amount of trading liquidity in NBP. The U.K.’s largest storage facility at Rough has been placed under capacity restrictions and it will further limit the country’s already limited storage.

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