High spot LNG prices expected to support Asian LSFO in winter
High LNG prices in Asia are likely to encourage North Asian electric utilities to switch from LNG to low sulfur fuel oil during the northern hemisphere winter in the fourth quarter of this year, while the prevailing tightening for high sulfur fuel oil moves towards its low sulfur equivalent, market sources said in the week of Sept. 20.
âNorth Asia, like Japan, South Korea and Taiwan, will start increasing the consumption of LSFO for the winter,â said an Asian refining source.
Winter is the season when power utilities in North Asia, especially Japan and South Korea, experience high demand.
LNG spot prices have been on an uptrend since hitting this year’s low of $ 5.563 / MMBtu on March 2-3 for April delivery cargoes. Platts JKM – the Asian benchmark for LNG – hit $ 28,538 / MMBtu on September 21, its highest level since January 14, when it was valued at $ 32.50 / MMBtu, before falling to 27,266 $ / mt on September 22, according to data from Platts.
The tension in the European LNG market has had a knock-on effect on Asia. In Europe, the combination of strong demand in the winter of 2020-2021, low storage levels and relatively strong demand during the spring offseason supported prices in the Atlantic Basin. Likewise, Asian importers imported more for much of 2021 following low stocks due to high demand and production issues in winter and spring.
“[LNG] Prices are likely to hold up unless the winter is extremely warm. Then the Chinese and the Japanese will start selling, âsaid a Singapore-based LNG trader.
âAt such high LNG prices, we are also considering reducing our production of electricity to LNG,â said a Japanese LNG importer.
A Japanese utility company agreed and said, â[LNG] input costs are getting higher and higher. I think the factories will start to close [LNG-fired power generation] for the metal and ceramic sector.
North Asia has yet to boost the purchase of LSFO
Electric utilities in North Asia have yet to increase their purchases of LSFO, fuel oil and bunker traders said during the week that began on September 20.
âJapanese power companies have secured LNG on futures contracts and there is little flexibility. Learning from January of this year, they seem to have enough LNG stocks. Japanese power companies have yet to start increasing purchases of LSFO, âsaid a third fuel oil trader.
Several traders noted that Japanese importers buy most of their LNG through long-term contracts, which are tied to oil benchmarks. Thus, higher LNG spot prices will only affect a number of utilities that are heavily dependent on spot supply.
The Asian market for 0.5% S marine fuels is currently well supplied across the region, market sources said.
Sealing to go from top to bottom sulfur Q4
High LNG prices had increased Asian demand for high sulfur fuel oil. The region’s supply of HSFO has been tight as demand from the Middle East and South Asia increased in the third quarter, as countries like Bangladesh and Pakistan have switched from LNG to HSFO since July, when LNG prices have exceeded those of HSFO.
The demand for Asian FSO from the Middle East and South Asia typically increases in the summer, or from the second to the third quarter of the year, while the demand for FSO from North Asia increases in the winter, or from the end of the fourth trimester to the beginning of the first trimester.
“LSFO [import] demand in North Asia is probably around 200,000-300,000 t / month in winter, âsaid a Singapore-based fuel oil trader. A Japanese LNG importer said on September 16: “There are probably around three shipments of LNG consumed that can be replaced with fuel oil throughout Japan, by December 2021.”
A Singapore-based fuel oil trader said: âThe Asian fuel oil market is going to tighten, but there is a limit to the tightening of LSFO because refiners can always increase LSFO production when margins are high enough.
According to the Platts trade flow analysis software cFlow, Japan imported the largest amount of LNG to Asia in March with around 5.9 million tonnes, in July with 6.6 million tonnes and in August with 6. 3 million tonnes. On the other hand, China imported the most to Asia in 2021 with April at 6.6 million mt, May at 7.4 million mt and June at 6.6 million mt.