JKM reveals three LNG surprises in three years – tightness, correlations and seasonality

Platts JKM, the benchmark LNG spot price, has revealed three important surprises over the past three years.

In 2015, most analysts expected the LNG market to weaken considerably, increasingly de-correlate from oil and reduce seasonality.

Three years of JKM analysis counters all three expectations — as well as re-emphasizing the importance of market-based LNG pricing, and derivatives — in helping market participants flexibly react to unforeseen developments.

2015-Present: three JKM/LNG surprises versus expectations

1. LNG market balanced, despite expectations of weakness

On an absolute basis, the JKM averaged $7.10/MMbtu in January 2015, and is currently $10.375/mmbtu, almost 50% higher. On a relative basis, the JKM has steadily strengthened relative to the NBP since 2015, stabilized versus Brent, and has gradually declined versus coal.

JKM percentage of other fuel prices

The S&P Global Platts price assessments used to create the above chart were: LNG Japan/Korea Spot Crg DES, UK NBP Gas $/MMBtu, Dated Brent MAvg and Thermal Coal FOB Kalimantan 5900 kcal/kg GAR 90 Day $/mt.

This dramatic absolute JKM rise, and mixed relative JKM strength, indicates a balanced LNG market, confounding expectations of ramping-up supply overwhelming the market. While global LNG supply has ramped up, three inter-connected surprises over the past 36 months have supported the JKM:

a) Ongoing Northeast Asia LNG demand strength — Accounting for 60% of global LNG demand combined, each of the four Northeast Asian LNG importers increased their annual LNG imports in 2017, after most also increased their imports on a year-on-year basis in 2016. This strengthened the JKM, especially versus the NBP and, in 2017, helped stabilize the JKM versus coal prices. In particular, China dramatically prioritized regasified LNG use over coal.

b) New LNG importers start up — Seven new LNG importers have started up since January 2015, generally rapidly using FSRUs. In most of these countries – Pakistan, Jordan, Jamaica and Malta – LNG imports directly offset oil imports, making LNG increasingly attractive as oil prices rose and helping to stabilize the JKM relative to Brent.

c) Oil price ramp up — Brent averaged under $48/b in January 2015 and its sharp subsequent rise boosted LNG demand/prices by encouraging LNG importers to increase volumes associated with their term oil price-linked LNG contracts as well as a fuel switch towards LNG, away from oil products, helping to stabilize the JKM relative to Brent.

2. LNG, oil price correlations increase sharply, despite expectations of de-correlation

Many analysts expected LNG and oil prices to increasingly de-correlate as LNG supply surged while oil prices rose. Since 2015, however, the JKM has become dramatically more closely correlated with oil prices, as well as with both NBP and Asian coal prices.

JKM correlations

The S&P Global Platts price assessments used to create the above chart were: LNG Japan/Korea Spot Crg DES, UK NBP Gas $/MMBtu, Dated Brent MAvg and Thermal Coal FOB Kalimantan 5900 kcal/kg GAR 90 Day $/mt.

These tighter correlations are partially explained by the above a), b) and c) factors, as well as:

d) Destination-flexible US Gulf LNG supply ramping up — Since starting exporting LNG in February 2016, almost 240 US Gulf LNG cargoes had been produced by end 2017. Surprisingly, almost half of these cargoes were delivered into Asia and the Middle East, with only around 15% into Europe, as cargoes flexibly diverted to higher East of Suez LNG demand/prices, helping to strengthen the JKM and NBP correlations.

3. LNG seasonality ramps up dramatically, despite expectations of flattening

JKM seasonality has ramped up dramatically since 2015, confounding expectations of the supply wave and the growth in counter-seasonal importers suppressing monthly pricing variations.

JKM high/low month % swing

.The above chart shows the percentage difference between the lowest and highest monthly JKM in each year. The S&P Global Platts price assessment used to create the above chart was: LNG Japan/Korea Spot Crg DES.

The typical Northern Hemisphere seasonal LNG buying patterns of Northeast Asia and Europe, which combined represent over 75% of global LNG demand, means a) above significantly increased JKM’s seasonality, in addition to:

e) Weak 2016/2017 South American LNG demand — South American LNG imports fell dramatically in 2016 and then flat-lined in 2017 due weather and the ramping up of domestic gas supplies, suppressing LNG demand from these counter-cyclical seasonal buyers.

f) Declining 2017 Middle Eastern LNG demand — The Middle East is the other key LNG importing region with counter-cyclical buying, but regional imports fell in 2017 as Egyptian domestic production grew and the UAE increasingly relied on alternative fuels.

g) No US Gulf LNG production shut-ins — US Gulf Coast LNG has the option to shut in, potentially providing a stabilizing LNG pricing floor in low global LNG demand months. However, due to 2016/2017 relative LNG market strength, these shuts-in have not been incentivized.

Importance of market-based LNG pricing and derivatives

Three fundamental LNG surprises in three years, revealed by JKM analysis, re-emphasize the importance of market-based LNG pricing, and derivatives, to help participants flexibly react to unforeseen developments.

Growing JKM usage for both spot and term LNG pricing ensures transactions remain market-priced despite unforeseen market changes, enhancing relationships and providing transparent price signals for facilitating the vital long-term investments across the LNG value chain.

Once players possess physical JKM exposures, they can then hedge them in financial markets — which has underpinned 2017’s year-on-year quadrupling in traded JKM derivatives.
Marc Howson, Director, LNG Market Development, S&P Global Platts

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