Buyers & Sellers: The balance of power in the LNG market in 2016

Stephanie Wilson's picture
Stephanie Wilson, Managing Editor, Asia LNG, Platts
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Part 1 - After years of calling the shots, the balance of power in the LNG market has shifted away from sellers, as increasing supply and low prices have cumulated to swing the market back in favour of the buyers. At least for the time being.

Gone are the days when consumers –particularly those in the legacy markets of Japan and South Korea – eager to lock in volumes, would agree to high indexations to crude oil and the most restrictive of delivery terms.

Instead buyers – who are for the main part well supplied until 2020 – are in no rush to lock into term contracts, despite current low prices and a multitude of bases for indexation on offer.

Speaking at the first official LNG Procurement Forum at the recent Gastech Conference & Exhibition in Singapore, which gathered an unprecedented number of industry leaders from key Asian consumers, LNG Buyers outlined their requirements for new contractual volumes.

High on everyone’s list was “flexibility”, which appears to have overtaken both price and security as the number one priority for now.

But flexibility looks very different to different market participants. While everyone seems to agree that price is no longer the only “cost” to be weighed when choosing a term partner and project -- a lesson learned perhaps from the Henry Hub rush -- different buyers are now facing very different pressures.

While most in Asia are still struggling to make LNG competitive against alternative fuels and domestic gas supplies, unprecedented uncertainty in both the global and downstream markets, exposure to different indices and – in some cases – market deregulation, are now also creating clear divisions among buyers and breaking a herd-like mentality that has been symptomatic of the LNG industry.

Leading the charge for flexibility are those who harbour ambitions to move into the trading space, either out of necessity due to over-commitment, or as a means to grow revenues. These buyers appear to be more focused on lifting destination restrictions than anything else, enabling onward trade of cargoes.

In their view, a market price such as JKM and security of supply will follow – probably around 2018 when a slew of projects in the US and Australia come online – as a liquid spot market develops. Here, one could procure or sell volumes at short notice, at a price that reflects LNG supply and demand fundamentals, rather than attempting to gauge demand and lock in cargoes priced against oil or domestic gas months in advance.

While this would undoubtedly provide a contingency for spare volumes, arguably the risks around trading have never been higher. Oversupply has meant that spreads between regions and seasons have already collapsed. Meanwhile, $50/b oil has eliminated much of the potential gains that could have been garnered from Henry Hub pricing basis or optimization between spot and crude-linked term pricing.

The need for these buyers to embrace hedging strategies is evident and, as such, the need for market price indexation is clear. […]

This is part one of a two-part article, read the second half.

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To interact with and hear from senior industry executives attend Gastech Tokyo  04-07 April 2017.

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