Asian LNG markets pin hopes on summer demand uptick as buyers remain price-sensitive

Asia LNG market participants have turned their focus to upcoming summer demand following the end of the peak heating season, with temperatures and price competitiveness against alternative fuels identified as key factors.

Demand for spot cargoes during summer usually picks up in May and June as end-users prepare to restock.

Several Chinese importers told of S&P Global Commodity Insights that they were evaluating weather forecasts for summer before deciding to build up inventories from June onward.

Hotter-than-usual weather and drought occurrences in South China could reduce hydropower output and increase demand for spot LNG cargoes, one China-based source said.

"Demand for LNG last year was not too strong due to the presence of hydropower. However, with the drought in Yunnan and the forest fire in Guizhou this year, China's LNG demand for summer is still very unclear," the source said.

Spot cargo demand in Japan is expected to rise on potential spark spread opportunities as power prices likely strengthen on increased usage during summer, according to a Japanese source.

Participants are also expecting more buyers from Thailand to enter the spot market this year in the event of increased domestic needs from hotter weather. Thai buyers have issued a total of 14 tenders -- double the number of buy tenders issued over the same period in 2023.

"I think the recent active spot procurement by PTT is already showing strong summer demand. Seems like it will be quite hot this time due to the potential transition to La Niña," a market source said.

The warmer and drier-than-usual conditions caused by La Niña are expected to increase demand for spot LNG cargoes in Asia for power generation.

Higher prices can stem China, India purchases

While some traders held bullish views for the upcoming summer season in Asia, others said demand for spot LNG cargoes this summer would come with caveats.

Demand is highly dependent on spot price levels, especially for price-sensitive importers such as China and India, traders said.

In China, several buyers are contemplating locking in portions of their demand through pipeline gas contracts with national oil companies. These contracts offer cheaper prices, often below $8/MMBtu equivalent.

"During summer, Chinese utilities can easily cut gas power and switch to other power plants if prices are not favorable," a China-based source added.

Southern Chinese buyers have observed a lack of significant growth in industrial demand. They have found it challenging to anticipate an increase in LNG demand based solely on higher residential usage in summer, with buyers expecting demand to rise 4%-5% this summer.

End-users across Northeast Asia have remained on the sidelines amid sufficient inventories due to a mild winter previously, with only Japanese entities seeking spot cargoes for May and June shipments, several traders said.

The South Korea market is adequately supplied until June and participants were not rushing to procure summer cargoes, especially since heat wave forecasts in the country have yet to be seen, local sources said.

With reduced competition from Europe, an uncertain macroeconomic growth in Asia and ample supply in the spot market, Asian buyers are not feeling pressured to procure spot cargoes, leading to bearish price expectations for summer, according to sources.

"The contango market structure for the summer season is expected to flatten with softer demand expectations in both Europe and Asia," a trader said.

Platts JKM, the benchmark price reflecting LNG delivered to Northeast Asia, was assessed at $9.446/MMBtu on April 4, S&P Global data showed.

A mild backwardation structure was assessed between May and June shipments at 2.95 cents/MMBtu April 4. However, the market structure between May and June shipments was at a contango of 57.65 cents/MMBtu on the same day a year ago, S&P Global data showed, reflecting narrower month-to-month spreads in Asian spot markets.

Bearish summer demand in Europe

Meanwhile, demand for spot cargoes in the Atlantic region is expected to decrease this summer due to relatively high storage levels, market participants said.

Italian and West Mediterranean buyers are inclined to submit stronger bids compared to other European buyers, given the earlier onset of warmer weather in these regions, industry sources said.

But a surge in demand from European buyers aiming to build stock ahead of summer is unlikely to occur anytime soon due to higher-than-expected inventory levels, hovering around 58%-59% full as of April 3, according to Aggregated Gas Storage Inventory data.

"Current inventory levels in Europe are higher compared to last year, so there isn't any market sentiment driving up summer procurements in Europe this summer," a trader said.

Cooling demand in Europe is typically weaker compared to heating demand, another trader said.

"European buyers primarily focus on stockpiling pre-winter, while strategically plan their purchases for summer based on fundamental demand," said the trader, who added that industrial demand is less likely to have a significant growth in Europe.

The Platts DES Northwest Europe Marker for May was assessed at $8.140/MMBtu on April 4, according to data from S&P Global.