LNG market needs better answer than rigid oil-linked contracts
The price of liquefied natural gas spot sales has ticked up recently in Asia toward $5 per million Btu amid tentative signs of some peak summer demand, but the problem remains that for many buyers their cost of supply is still too high. While the market focuses on spot prices to gauge the extent of oversupply, or the strength of demand, it’s worth noting that the market for short-term sales is dwarfed by the far greater volumes procured under long-term, mainly crude oil-linked contracts.
This means that for many LNG buyers, the decline in spot prices is largely irrelevant. While spot prices have slumped by half this year with oversupply, the long-term contract price, which accounts for two-thirds of the global market, has fallen by a considerably smaller margin. South Korea paid an average $9.40 per million Btu for its LNG imports in July, only 6 percent less than the $10.01 in July 2018, according to customs data. Japan’s imports cost an average $9.14 in June, down 7 percent from $9.79 a year ago.
The fact that both Japan and South Korea haven’t seen much benefit from lower spot prices for LNG is largely a reflection of the higher cost of crude for much of the first half of 2019. It’s therefore not surprising that LNG imports in both Japan and South Korea have been falling. For the first seven months of the year South Korea’s imports were 22.9 million tonnes, down from 25.4 million last year. In Japan, imports for the first half were 38.6 million tonnes, a drop of 8.2 percent compared to the same period last year.
Reliance on long-term contracts for much of Asia’s LNG is a concern. If suppliers are to sell all their production from new projects, they’ll have to accept lower prices and flexible pricing, and by doing so risk undermining the economics of existing and new ventures.