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Commodities

Severe winter forecast sparks recovery in Asia's LNG prices

Production halts by hurricanes also help bring market out of coronavirus funk

Imported LNG arrives in northern Japan at a Hokkaido Electric Power terminal. LNG prices plunged this year as economic activities froze due to the coronavirus outbreak.   © Kyodo

TOKYO -- Gas prices in Asia have begun to recover from the coronavirus-induced plunge earlier this year, driven by predictions of a colder winter and disruptions to U.S. production caused by hurricanes.

The spot price for liquefied natural gas in Northeast Asia is around $5.20 per million British thermal units, nearly three times above the record lows from earlier this year. The figure remains below the roughly $6 logged in fall 2019 but has recovered to where it was before the coronavirus spread across the world.

Even as the pandemic dampens commercial demand for gas, new weather risks are raising the prospects for a tighter market, prompting Japanese utilities to snap up LNG contracts on the spot market. The recovering Chinese and Taiwanese are also helping the market, as is Japanese demand, which has been on the rise after bottoming out in May.

Demand for LNG typically increases around this time of year as utilities stock up for winter. Japan, in particular, is forecast to experience a colder-than-usual winter due to La Nina, a period of colder ocean surface temperatures in much of the Pacific.

"Electricity providers are snapping up more LNG on the spot market" to prepare for an increase in power demand, an energy analyst said.

"It felt like there was more of a surplus in the spring and the summer, but the market is improving with China's recovery," said Tokyo Gas Chairman Michiaki Hirose, who is also chair of the Japan Gas Association. "Demand is still recovering. I hope for a cold winter."

While demand strengthens, weather poses increasing risks to LNG supplies. In the U.S., a top producer of the fuel, the Cameron LNG facility was forced to suspend operations over damage from Hurricane Laura in late August. Though repairs have begun, a full recovery at the Louisiana facility is some ways off.

Multiple LNG projects have started in the Gulf of Mexico in recent years. But U.S. facilities face the constant risk of hurricanes. The Sabine Pass LNG terminal, also in Louisiana, was forced to suspend supply operations in 2017 due to flooding by Hurricane Harvey.

Japan is one of the world's largest LNG importers. Most of the fuel comes from long-term contracts with suppliers in Australia and Southeast Asia. These prices track crude oil prices.

Because import costs per unit have moved in the $7 range, interest has run high toward more affordable spot contracts. It appears that spot and other short-term contracts have exceeded 30% of global LNG trading volume.

The Tokyo Commodity Exchange plans to offer LNG futures trading soon so that traders can hedge against fluctuations in spot prices.

"We aim to set it up in two years," said Takashi Ishizaki, president of the Tokyo Commodity Exchange.

The operator looks to have LNG futures revitalize the market together with electricity futures, which were traded on a pilot basis in September 2019.

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