Sharp fall in LNG prices reinforces dissonance emerging from fixed price tenders

The sharp fall in LNG prices on April 4 has reinforced the dissonance that emerges from the use of fixed prices in the procurement of cargoes in the spot market.

That day saw China announce reciprocal tariffs of 34% on US goods imports after the US administration of President Donald Trump unveiled sweeping tariffs on its trading partners, with China now facing a 54% measure on its exports to the US.

The increasing trade tensions between the two leading economies triggered fears of a global economic slowdown which hit market participants' sentiment regarding commodities, with a fall in gas demand from industrial sectors now expected.

Energy commodity prices fell sharply with a fall observed for crude oil, gas hubs, and LNG.

Platts JKM -- the LNG benchmark price assessment for spot physical cargoes -- was assessed at $11.76/MMBtu for the June derivative at the London market close, versus $12.50/MMBtu at the Singapore close -- a fall of nearly 74 cents/MMBtu in the hours between Singapore and London. Platts is part of S&P Global Commodity Insights.

An Indian company that had issued a tender on a fixed price basis for late April-early May delivery did not award it because the offered prices, near mid-$12/MMBtu, in the tender were sharply higher than the market prices at the end of the validity period, near mid-$11/MMBtu, sources said.

Seller considerations

A trader participating in a fixed price tender with validity for just a few hours considers some risk factors while offering a price.

The trader is potentially conceding cost of opportunity if the LNG price rises during the validity period with potential to sell to another buyer at a higher fixed price. Further, the trader also typically passes on the cost of hedging its fixed price exposure onto the buyer.

Traders also consider the risks associated with fixed price tenders as a function of Value at Risk. Fundamentally, VaR helps to quantify the potential loss in a time frame with a certain confidence level.

A Singapore-based source said that while a fixed price offers no exposure, traders can aim to increase exposure to the market if they think the price is going to rise by converting the fixed price into a floating price by buying at a fixed price but selling at a floating price.

Typically, companies in South Asia and some in Southeast Asia still purchase cargoes on a fixed-price basis. However, companies in Northeast Asia, Thailand and Europe largely purchase cargoes on a floating price basis.

Traders and portfolio companies prefer trading cargoes on a floating price basis.

Time spread for prompt purchases

Some companies consider that purchases for prompt periods can only be completed on a fixed price basis as the JKM full-month average for such periods would already be priced out.

For example, on April 7, companies looking to purchase cargoes for early-May delivery may consider that the JKM May derivative has already undergone significant time decay and would perhaps be better to purchase on fixed price basis. However, companies can consider trading cargoes on a JKM June derivative basis with the advantages of floating price, which is seen as a common market practice.

If there is limited liquidity in JKM balance-of-month next-day May, then traders can use JKM June as a proxy. However, the basis spread between JKM balmo-ND and JKM June can be wide or narrow, depending on the demand and supply dynamics, a trader said.

A Europe-based trader in the week ending April 4 said that sufficient cargo availability in May and relatively tighter balances expected in June meant a wide spread between the two derivatives.

On April 4, the spread between JKM balmo-ND and JKM June futures was 29 cents/MMBtu, Platts assessment data showed.

Crude-linked strip tenders

A large number of market participants in Asia consider JKM to be the pricing basis for tenders for a strip of cargoes when they are looking to purchase or sell clips.

If the tender pricing basis is a non-LNG index, such as crude oil, market participants look at the spread between crude oil and the JKM.

If a Brent-linked tender has a validity of a few hours, the price spread between JKM and Brent crude oil forward curves could move in different directions, so the traders consider slippage on both pricing bases, a European trader said.

This was demonstrated by how much the JKM prices moved between the Singapore and London closes on April 4.

Another Indian company closed a tender on a Brent pricing basis April 2 for three cargoes/year for three years. The tender was not awarded with the best offers in the range of a mid-15% to high-15% slope to crude oil.

On April 2, the average of Platts Dated Brent crude prices for June-July 2025 and April-June 2026 and 2027 was $70.97/b while the average Platts West India Marker LNG price for this period was $11.203/MMBtu, ICE data showed.

Showcasing the impact of spot prices on the forward curve, the average for the same periods for Platts Dated Brent was $63.61/b and the WIM average was $10.43/MMBtu.

Therefore, the equivalent crude oil-linked slope actually moved up to 16.4% on April 4 from 15.8% on April 2, even as LNG prices moved down by nearly 80 cents/MMBtu.

"With contract tenures getting shorter and more usage of JKM typically more companies will start doing such strip sort of tenders on JKM basis possibly," an India-based importer said.

"When JKM and WIM drop, downstream buyers may start doing deals based on that," a Singapore-based trader said.