Demand and supply dynamics in energy markets do not take long to readjust and this is just what’s happened in the Asian liquefied natural gas markets. A year back producers were worried about a supply glut but robust demand by Asian countries, China in particular, has helped LNG prices recently achieve their four year seasonal high.
LNG prices are up almost 80 percent as compared to the same period last year with the Platts’ Japan-Korea marker trading at almost $9.60 per MMBTU while the futures spread has also increased as market expectations are of a further demand up-tick in the next half of this year.
China’s LNG imports have increased by 60 percent year-on-year in 5MCY18. Pakistan has had a similar increase in imports of LNG with the shift of the power generation mix in favour of LNG. Other Asian buyers including India, Singapore and Taiwan have also stepped up their imports
Higher oil prices are also behind the buoyed LNG prices and if the coming winters see oil prices crossing the $70 price mark, a proportionate increase in LNG prices to $12 per MMBTU is on the cards given most contracts are still linked to Brent. In addition, while demand has risen, there have been supply bottlenecks at leading LNG export terminals across the globe.
Pakistan’s appetite for LNG has been rapidly increasing, as domestic production continues to fall short of peak demand. There are two LNG terminals already operating with a combined capacity of 1200 mmcfd while an additional three to four regasification terminals might very well be in place in the next couple of years to make up for the dwindling domestic gas supply.
Volatility has been a key measure of energy markets historically and the emergence of China as the world’s leading LNG buyer last year has made many analysts revise their bearish expectations of LNG prices.
The next government would do well to encourage competition in LNG procurement and the aim should be to reduce the difference between long-term and short-term contract prices while looking for flexibility in contract enforcement.
