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An Exceptional LNG Winter - Barış Sanlı

LNG prices have reached sky-high prices and approached 40$/mmbtu. This was completely unexpected, but so does the weather. The covid part of the story has an unusual twist. But LNG markets are bizarre, and it has highly seasonal characteristics, as well as a global commodity in the making, is happening.

The cold weather in North-East Asia is the major culprit of this event. Then comes the covid, and then the panicking. There is so much detail in the whole story that interacts with Panama channel slots and defaulted cargos for late February and a hidden ban on Australian coal.

In Japan, due to covid precautions, the open window policy has increased heating demand. Having a very cold winter period exasperated the demand. In China, due to political strain with Australia, Australian coal has been unofficially banned. The ban started in October and then extended. This changed the flow of coal trade and coal support prices around the world. China bought Colombian and South African coal with higher shipping costs. Covid also delayed and diminished coal production and imports from Mongolia.

Trade data suggests that Japanese companies didn't expect such intense cold weather. But 3 out of 33 reactors are totaling 2960 MW of nuclear capacity online. Before the Fukushima disaster, there were 54 reactors. Most of the reactors are going through re-licensing. The increase in electricity demand was more than expected, and it created a surge in LNG demand. The price spikes in LNG has fed into electricity prices. Electricity prices spiked to 2000$/MWh, which was the government-administered cap for the market.

But as the cold continues, the demand for LNG has continued its surge. The shipping rates reached a record 350,000$/day. The cargos for "the rest" have been defaulted. Nearly all cargos were diverted to North-East Asia, and most probably Japan. Generally, the shipping rates peak to 150,000 $, but during the normal season, the prices hover around 20,000-60,000$.

The chokepoints around the world also contributed to this bonanza. The delays or limited slots at the Panama channel limited the number of ships to Asia from the US. This problem is expected to continue until March. On the Russian side, Novatek is testing to use the Northern Sea Route for January-February voyages through the Arctic. It is extremely difficult during this season, but two tankers are testing the route as of 5-6 January.

When we experience high prices in any commodity, we see an increase in that commodity's supply side dynamics. An accelerated nuclear re-licensing period in Japan may be one of these dynamics. Another one is the restarting of some idle LNG plants, such as Prelude LNG. New investments are also coming, such as Driftwood LNG.

Now another LNG cycle will dominate in the coming years. From relations between Australia and China to Arctic voyages, nuclear re-licensing to Panama channel, shipping rates to coal switching, it looks like an interesting period to watch. Like negative oil prices, record LNG prices are not the norm but a hidden puzzle to be solved. We will check trading house statements in the next quarter for clues.


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