Why Asian LNG prices have risen in Q4 20? - a podcast by Macro Crude

The premium of Asian LNG spot prices (JKM) over the US Henry Hub benchmark has widened to the highest level in nearly two years (spread >US$5/mmbtu). This is partly a function of Pacific basin supply outages coinciding with congestion at the Panama Canal. As a result JKM contracts are pricing in the cost of securing US cargoes through longer transit routes around the Cape of Good Hope (costing an extra US$2.4/mmbtu at current freight rates). Wait times outside the Panama canal have been around nine days recently (Chart of the day), adding almost $0.40/mmbtu to using the route to Northeast Asia without waiting. 

Panama Canal congestion is causing delays to LNG deliveries from the US to Asia, driving up freight rates

• Higher than average arrivals, seasonal fog and      COVID-19 linked staffing reductions is causing congestion at the Panama      Canal.


• Waiting time for vessels with unbooked slots      is as long as 10-15 days and some US cargoes are now transiting through      the Cape of Good Hope.


• The extra shipping cost associated with a      97-day round trip for a US cargo to Northeast Asia via the COGH relative      to delivering to Europe is $2.40/mmbtu at prevailing freight rates and      boil-off costs.


• The Panama route costs $1.16/mmbtu extra at      current rates. The less time vessels spend holding position, the more      tonnage can be freed up and made available to the spot market, in turn      reducing spot freight rates.

Below factors could help ease strength in the JKM Feb-21 contract to reflect the cost of securing the marginal cargo through the Panama route, rather than pricing on more longer routes at present:

• A sequential increase in Pacific basin supply      equivalent to around 8-14 cargoes per month compared to today will help      cut Northeast Asia’s call on US cargoes.


• 3.6 Mtpa Prelude is expected to return by year-end,      followed by the return of Gorgon’s 15.6 Mtpa capacity at the end of Jan-21      (assuming no weld faults are found in trains one and three). The restart      of production at Qatargas’ 7.8 Mtpa train four at Ras Laffan next week      will also boost supply, as will the ramp-up of Egyptian      output—particularly from Idku, with some potentially from Damietta.


• Sequential declines in Northeast Asian demand      for LNG over the rest of winter is also likely. Japan and Korea are      expected to see improving availability in nuclear, and both countries will      be drawing down LNG terminal stocks. China will also be partly relying on      drawing down their undergrounds gas inventories – which have been boosted      y/y by heavy injections.

Per the below LHS chart, the JKM-TTF spread is incentivising transit through the Cape of Good Hope (green line). Costs of using the Panama canal have risen. With higher transit times through the Panama Canal – ships are using the route through the Cape

Further episodes of Macro Crude: Understanding Finance and The Global Economy (Oil, Stocks, Commodities, Currencies)

Further podcasts by Macro Crude

Website of Macro Crude