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Asian LNG demand set for summer jump

Spot prices steady; Japanese needs still unclear; Europe awash with gas

The number of Asian buyers looking for liquefied natural gas (LNG) cargoes picked up this week, but this is yet to translate into higher spot prices.

Although market participants estimated spot prices to be flat, at a little over $12/million British thermal units, few deals had been struck at this level, with buyers still pondering the direction prices will take in the aftermath of Japan’s devastating earthquake in March.

“There hasn’t been much activity for us, although we’re seeing strong demand from South Korea, China, and Taiwan. They’re buying for summer and winter,” said one LNG trader.

All eyes on Japan

All eyes are on Japan, with the country’s LNG consumption directly correlated with temperature, affecting electricity demand for air conditioning. After the earthquake and tsunami knocked out around 10 gigawatts (GW) of nuclear power capacity, the country is expected to make up for most of the electricity shortfall with increased gas-fired generation.

Other Asian countries also import additional spot cargoes during the summer, meaning spot prices could climb, leaving buyers uncertain whether to crystallise prices now, before they rise, or hope they drop before needing to secure supplies to meet winter demand.

The Japanese Meteorological Agency is forecasting a 40% chance that temperatures in northwest Japan – the region worst hit by the nuclear plant outages – will be higher than average between May and July. But this may be offset by lower regional electricity demand resulting from damage businesses and industry, as well as energy-efficiency measures.

Kyushu Electric Power has warned of power shortage of up to 20-25% this summer if it cannot restart two nuclear reactors at its Genkai plant (with a combined capacity of 1.66 GW) because of additional safety measures introduced after the problems at the shutdown Fukushima-Daiichi plant.

With the utility also shutting its 890 megawatt Sendai nuclear plant for planned maintenance, it has been forced to dip into the LNG market buying spot volumes at high prices.

Wider Asian demand for spot cargoes may also increase as buyers search for a cheaper alternative to expensive oil-linked long-term prices – North Sea Brent crude has climbed by over a third to $124 a barrel since the beginning of the year.

In Europe, Spanish LNG imports are expect to remain low, with consultancy Pan Eurasia calculating deliveries for the first half of 2011 at 9.6 million tonnes compared with 10.4 million tonnes over the same period last year.

UK record

The UK, meanwhile, imported record volume of LNG in April, as predicted. But analysts doubt if Europe can absorb much more as the region enters the warmer summer months with inventory levels high and contracted Russia pipeline supplies still to come.

“Plentiful gas availability should continue weighing on European prices this year … and 10 billion cubic metres of contracted Russian gas must still be delivered,” said Emmanuel Fages, European gas and power analyst at Société Générale.

Customers in continental Europe buy most of their gas from Russia under on oil-linked take-or-pay contracts providing little manoeuvrability to take lower than agreed volumes. 

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