Analysis: Term LNG buyers face higher prices over Saudi oil disruptions


Analysis: Term LNG buyers face higher prices over Saudi oil disruptions

Singapore — Any sustained increase in oil prices following the attacks on Saudi oil facilities over the weekend could amplify the pain for long-term LNG buyers with oil-linked contracts, already concerned by the significant premiums they have been paying over spot LNG, while on top of that marine insurance premiums look set to continue to rise on concerns of violent escalation in the region.The widening price differential between spot and contracted LNG supply is expected to result in a stronger pushback from buyers, with markets bracing for tough contract renegotiations and price disputes. The S&P Global Platts JKM for November, the new front-month, was assessed at $6.183/MMBtu Monday, up from $5.20/MMBtu Friday, helped by higher crude prices, while the oil-linked LNG price could be as much as $10/MMBtu for the contracted LNG.

ICE Brent November futures closed at $68.67/b on Monday, up from Friday’s settle of $60.22/b. For buyers of term LNG, every $5/b increase in oil prices equates roughly to a $1.5 million increase for a standard LNG cargo of 150,000-170,000 cubic metres. Term LNG cargoes are costlier than a spot cargoes of $18-$21 million by nearly $9 million each.

The spot price decline has led to many long-term buyers questioning whether they are paying, in some cases, a very significant premium over the prevailing market price in order to achieve security of supply, Dan Perera, Partner on the Energy & Natural Resources team at Reed Smith, said Tuesday.

“With traders now entering the market en masse and the oversupplied market conditions which we are now seeing, we are expecting to see an increase in price reviews and potentially disputes across the board,” he said.

“The curtailment of supply of Saudi Arabian crude oil, following the weekend’s drone strikes, is also likely to have an impact, as prices of LNG which remain pegged to crude will rise significantly, whereas the impact on LNG spot pricing may not be as significant,” Perera said.

Meanwhile, marine insurance premiums are on the rise. At least one large commodity trader said premiums have risen amid concerns about further escalation, with rates for deliveries to Kuwait quoted at around $200,000-$250,000 per voyage, nearly double levels quoted over recent months, and likely to increase further.


Spot LNG prices were stuck in the $4-$5/MMBtu range from April to August due to oversupply. But more notable than the flat price was its relationship with crude — the oil slope equivalent had at times dipped below 6% of ICE Brent futures.

This was the lowest it had fallen in years and drove much of the contract renegotiations and changes in LNG pricing structures. The decoupling of crude and LNG prices was front and center again this week with oil hitting $70/b, jumping nearly 20% as markets reopened after the weekend attack, before easing back again.

“The disruption in Saudi supply from the attack comes at an interesting time from an LNG perspective,” Jeff Moore, Manager, Asian LNG Analytics at S&P Global Platts said.

He said the gas market was just starting to turn a corner on some supply disruptions in Europe, such as an EU ruling that could block Russian gas supply to Europe, which was providing some support and change in market sentiment. This was expected to narrow the spread between oil and gas.

However, with the Saudi attacks lifting oil prices in the near term and helping support crude until 2020, when new International Maritime Organization rules marine fuels are expected to also support oil prices, there will likely be a continued dislocation of crude and LNG spot prices, he said.

“Our expectation is that the spread between JKM and a 13% slope Brent-linked contract will be about $3.25/MMBtu in 2020, which translates to more than $9 million per cargo,” he added.

This is a significant loss for many Asian buyers for whom LNG is the most expensive fuel in their generation mix, leading to a huge backlash.

India has said it would renegotiate its contracts with Qatar, while other South Asian buyers are seeking to diversify into spot markets and Singapore has become a hub for arbitration for an increasing number of price disputes in the region over recent months, especially since LNG spot prices went into a slump.

Some sellers are already agreeing to look at more flexible contract terms, and pressure on them is likely to mount in a higher-price oil environment.

“As long as it is fair and equitable, of course it is something that we would like to promote,” Malaysian national oil company Petronas’ head of origination Faris Mustaffa said at a conference in late August.

“We are certainly seeing an increase in pricing disputes as purchasers consider whether the pricing terms they agreed for long-term supply remain fit for purpose. Buyers will be looking to trigger price review clauses wherever their contracts permit,” Reed Smith’s Perera said.

He also expects an increase in disputes relating to traded LNG cargoes, as traders take incremental risk between their buy and sell contract positions.

“Trades are taking too long to execute, as a result of the absence of standard documentation, and that in turn leads to a greater number of parties seeking to renege on deals which were attractive at the outset of negotiations, but which became unattractive somewhere prior to execution,” Perera said.


Share Button

Leave a Reply