Sustained weak demand from North Asian LNG end-users, reflected in the slump in spot prices, has shown little sign of recovering despite the start of the traditionally stronger summer season.
Coming out of the April-May shoulder months, spot LNG prices have not -- as would be expected -- rebounded on summer stockpiling by end-users, with most buyers appearing to have ample term supplies to cover their requirements.
The summer months in North Asia, usually seen as July-September, are one of the two peak LNG demand seasons, with consumption increasing on the back of higher power demand resulting from greater air-conditioning use.
Relatively mild temperatures in spring were one of the main bearish factors capping demand from North Asia. The Platts LNG Japan Korea Marker for April deliveries over the period February 18-March 15 averaged $17.636/MMBtu, falling 7.9% from the March delivery average of $19.139/MMBtu.
The average May JKM also extended losses from April, sliding 12.3% month on month to $15.464/MMBtu. The June JKM averaged over April 16-May 15 continued to drop to $14.565/MMBtu, while the current July JKM assessments remains in the doldrums despite the onset of summer.
The July JKM was assessed at $14.450/MMBtu Tuesday.
In contrast, last year's monthly averaged JKM prices registered a steady upward trend since April. The April, May and June JKM in 2012 averaged $15.180/MMBtu, $15.986/MMBtu, $17.423/MMBtu, respectively. In particular, the JKM reached a record high for the year at $18.550/MMBtu on May 23, 2012 for July cargoes and the averaged July 2012 JKM was recorded at $18.000/MMBtu, up 3.3% month on month.
Initially in 2013, most players were expecting the same upward price trend as seen in mid-2012 given the lack of nuclear power generation in Japan, the world's largest LNG buyer.
But Japanese buyers, keen to avoid price spikes, have managed to meet a large part of their summer requirements through short-term contracts and early spot procurement. Some Japanese utilities -- including Kyushu Electric and Kansai Electric -- have also lined up additional supplies through strip deals under which they will receive a succession of cargoes of a period of time.
Furthermore, with power utilities in Japan using LNG for baseload power generation, the summer seasonality effect is likely to be less pronounced, as according to trade sources.
In addition, power-saving measures are expected to cap additional demand from end-users.
MARKET BULLS TO WATCH FOR SUMMER
Despite the overall muted interest from North Asia for spot cargoes in recent weeks, there has been support for spot prices from supply disruptions as well as the potential for increased demand from the world's single largest LNG buyer -- South Korea's Kogas.
Nigeria LNG declared force majeure on exports from its 22 million mt/year Bonny LNG plant in the Niger Delta on May 15 following a significant reduction in gas supplies by Shell.
Though there has been limited impact on Asian spot prices, the continued uncertainty around the duration of the force majeure has pushed more players into the market, particularly those with positions to close in Latin America and Japan without a dedicated contract of supply.
Short positions among several traders in Asia were becoming apparent for late July and even August, triggering some higher bids and offers for both the prompt and front month this week. As yet, no deals have been confirmed concluded above the mid-$14s/MMBtu for July or high-$14s for August.
Trade sources suggested that the issue at NLNG could take until mid-June to fix, though no official timeline has been given by the company.
Also in the Atlantic Basin, production at Statoil's 4.3 million mt/year Snohvit LNG facility in Norway was halted on May 28 after the fire alarm was triggered by smoke from an electrical cabinet. It was unclear when the plant would be restarted.
Meanwhile uncertainty surrounds Angola LNG's startup date, although many sources thought it could start commercial operations as early as July.
Demand-wise, possible re-entry of South Korean buyers following the unexpected closure of two more 1 GW nuclear reactors due to the forged safety certificate scandal, at a time when the market is suffering from supply disruptions has also provided some support to spot prices.
In addition, the scheduled restart of the 1 GW Shin Kori-1 reactor is being delayed as well, and the replacement of affected parts could take more than four months.
South Korea's government has warned of "unprecedented electricity shortages" this summer, adding that it would ensure stable LNG supplies for gas-fired power plants as the country goes all-out to avoid power shortages and blackouts.
With coal burn already close to full capacity, LNG is expected to make up the majority of the shortfall stemming from the loss of 3 GW of nuclear power generation capacity over the summer months, with some estimates suggesting an additional three cargoes per month would be required.
The nuclear outage has not spurred immediate action from Kogas, with trade sources saying that the company would likely draw on additional term supplies before turning to the spot market. However, this in itself would reduce supplies in the market.
In addition, temperatures play a primary role in influencing LNG consumption and could initiate additional buying from the Japanese buyers, who have been largely standing on the sidelines.
Forecasts from the Japan Meteorological Agency showed that 10 out of 12 regions in the country have a 40% probability of experiencing either average or above-average temperatures over June-August.
Finally, with current spot prices falling below term prices, buyers might be attracted to return to the spot market to fulfill their additional requirements should temperatures rise.
Trade sources were already seeing some renewed spot interests from end-users for August shipments, and Japan alone could see demand for two to three cargoes for the period.
