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Runaway LNG price sends warning to gas buyers

An unprecedented surge in prices for LNG in Asia is ringing alarm bells among industrial energy users on the east coast amid forecasts that domestic gas prices could be driven back up into double figures, despite lacklustre demand.

Freezing winter temperatures and a supply squeeze have driven north Asian spot prices for LNG to a six-year high of about $US15 per million British thermal units, an astonishing turnaround from the sub-$US2 levels of last June.

The sharp rally has triggered a spike in estimated LNG “netback” prices – the equivalent price in Australia to the spot Asian LNG price – to levels not seen since the competition watchdog started publishing netback prices at the beginning of 2016.

The latest prices released this week by the Australian Competition and Consumer Commission estimate an LNG netback price in February of $15.52 a gigajoule, 78 per cent higher than this month and almost seven times last July’s average.

In contrast, spot prices on the east coast were $5.30/GJ in Sydney on Tuesday.

That spells price pain for gas-dependent manufacturers on the east coast hoping for more affordable contract prices for the fuel, but relief for LNG exporters such as Woodside Petroleum, Santos and Origin Energy that were hit hard by last year’s slump in prices.

“With LNG spot prices experiencing their strongest rally in industry history, east coast gas prices should see material flow-on upside price pressure, with the return of double-digit domestic gas prices possible this year,” said Credit Suisse energy analyst Saul Kavonic.

He said LNG cargoes were being bid for at $US18/MMBTU, up from $US2/MMBTU six months ago, making it the biggest ever percentage rally in prices.

“It will fall materially again as the Northern Hemisphere winter eases, but it will still be materially higher in 2021 versus 2020,” he said, noting the forward curve for prices points to a 2021 average approaching $US8/MMBTU.

The price trend has also exposed the pitfall of any move to link domestic east coast prices and netback rates, as some east coast gas buyers have called for.

However more recently, manufacturers have been pushing for a linkage to the US gas price benchmark, Henry Hub. Some sources have said a reference to Henry Hub is to be included in the federal government’s heads of agreement on domestic gas under negotiation with the three Queensland LNG exporters.

Gas producer sources, however, suggest they are still baulking at any such linkage to US prices, which are driven by the shale-heavy US market.

“Domestic prices should be linked to international prices, and we are happy to share the risk that comes with that,” said a spokesman for explosives maker Orica.

“The point is that international consumers must not be able to buy Australian gas cheaper than Australians can.”

Extremely chilly mid-winter temperatures have contributed to the price spike, as have disruptions in LNG production at projects such as Chevron’s Gorgon in Western Australia, and congestion in the Panama Canal, said Graeme Bethune, head of consultancy EnergyQuest.

It was minus 8 degrees in Beijing on Tuesday morning and the city has a forecast high of minus 12 degrees on Wednesday, according to The Weather Channel.

Dr Bethune noted that sentiment around the future supply-demand balance was also a driver, and pointed to speculation about disruptions at other export ventures that had left the market “a bit skittish on the supply side”.

The extreme spike is envisaged to be temporary, with netback prices falling to $11.17/GJ in March, according to the ACCC.

But prices for the coming year are still set to be more than double levels for most of 2019, which was marked by a supply glut.

East coast short-term gas prices strengthened in December to an average of $6.51/GJ – up 50 per cent since June, according to JPMorgan, but weakened again over the quiet holiday weeks.

Subdued demand may soften the impact of the Asian LNG price spike on east coast prices, despite the two being linked since Queensland started exporting gas in 2015.

“[The east coast gas price] was firm in December; it eased up in the holidays, it’s not a real market at the moment,” said Garbis Simonian, managing director of NSW gas wholesaler Weston Energy.

He said the Asian LNG spike would have some affect on local prices, but it was yet to be seen how, given something of a “Mexican stand-off” between producers and some buyers.

Some buyers are still demanding “unrealistic” contract prices towards $4/GJ, while producers are warning that investment in new supply will be hit if the federal government intervenes to insert a price condition in the heads of agreement being negotiated with Queesland’s LNG exporters, Mr Simonian noted.

Dr Bethune said the volatility in spot LNG prices showed it made little sense to link domestic prices to those rates, and that if there were to be any international linkage, indexing with crude oil would be more appropriate.

For Australia’s LNG exporters, the sharp price recovery points to a rebound in revenues evident in upcoming quarterly reports. Woodside in particular was hammered through the middle of 2020 given its higher proportion of sales on the Asian spot LNG market, but that looks to be a benefit now.

EnergyQuest, meanwhile, confirmed that Australia’s LNG exports reached a record in 2020, despite outages at Gorgon and at Shell’s Prelude floating plant, and disruptions to demand due to COVID-19.

Exports reached 78 million tonnes in 2020, up from 77.5 million tonnes in 2019, with east coast exports also hitting a record high of 22.6 million tonnes.

The fact that Brent crude oil is now back over $US50 a barrel and the Platts JKM spot price for LNG for February deliveries is $US16.47/MMBTU, is positive for LNG export revenue generally and for the producers, Dr Bethune said.

Source: Financial Review