Asia LNG Price Spike: Perfect Storm or Structural Failure?

The big jump in Asian LNG prices in January as a result of very cold weather in Northeast Asia and supply issues at some export plants together with a seeming lack of spare LNG tanker capacity, led to the conclusion that a perfect storm had hit the LNG market. However, other factors were also at play which meant that the price spike may have been an accident waiting to happen. The lack of any meaningful gas storage in the region, especially in a country like Japan, means the market does not have the back-up flexibility that Europe has. This is compounded in Japan by the nature of its fragmented market with few pipeline interconnections between the main cities and regions. The other missing piece in Asia is the lack of a liquid physical trading market, as operates in Europe and North America. The price spike may also have implications for the possible use of benchmarks such as JKM, in contracts, whether short, medium or even long-term, if the market is not seen as having enough liquidity. To avoid a repeat, there seems to be no option other than for the right policies to be put in place to create a deep and liquid hub market where risks can be hedged, combined with additional short-term storage capacity.

By: Mike Fulwood