Gas is being squeezed out to Asia – Kommersant

The sharp decline in gas prices in Europe last week led to a significant Asian “premium” in the LNG market for the first time since the end of January. If the trend continues, some spot cargo is likely to be diverted to Asia, which could gradually stabilize prices in Europe. However, gas demand in Asia remains uncertain, with China not ramping up its spot LNG purchases this year, and other emerging Asian nations such as India, Bangladesh and Pakistan will increase imports only if prices fall further.

The galloping decline in gas prices in the European market in the second half of May caused the return of the “Asian premium”, which had been generally absent since January. The bottom line is that spot prices for LNG in Northeast Asia (Platts JKM index) at the end of last week exceeded spot prices on the Dutch TTF hub by 19%, or $1.5 per MBTU. This was almost entirely due to TTF falling 17% last week to $7.7 per MBTU.

Typically, in situations where the “Asian premium” approaches $2 per MBTU, spot cargoes are redirected from the Atlantic to the Pacific basin, since such a premium can cover the higher costs of transporting US LNG to Asia compared to Europe. In the current situation, the flow of spot LNG could slow down the fall in European gas prices and reduce the losses of Gazprom, whose export earnings this year have not yet met the government’s forecasts.

The question, however, is whether current LNG prices will be attractive enough for Asian importers. China, which was expected to sharply increase its LNG imports after the lockdown exit, actually reduced it in the first quarter compared to the first quarter of 2022. The other major Asian importers, Japan and India, were similar, with only South Korea showing some growth. Historically, LNG in major Asian economies competes with coal in power generation: for example, for India, its import becomes profitable only at prices below $7 per MBTU, while Pakistan and Bangladesh will need even lower prices.

Michael Meidan of OIES believes that Chinese traders could ramp up spot purchases to fill storage ahead of the winter season, also given China’s plans to double its underground gas storage capacity by 2025. However, prices should be low enough, while Chinese companies have the opportunity to cover almost all their needs through long-term contracts, as well as cargo not selected in 2022. “Sudden shortages could occur in the summer or ahead of winter, leading to short-term spot LNG purchases,” he admits.

However, for the time being, gas demand in both Europe and Asia remains weak, and it is not entirely clear to what levels prices should fall to stimulate consumption after the 2022 price shock. At the same time, for US LNG plants, exports are still extremely profitable thanks to falling domestic gas prices, the Henry Hub index is holding near $2.5 per MBTU, which allows most traders to pick up LNG cargoes in the Gulf of Mexico on FOB terms at a price of $3. 5–4 for MBTU.

Yuri Barsukov