BAKU, Azerbaijan, May 30. With renewed interest in long term contracts from both Asian and European buyers, the prospects for further FIDs on liquified natural gas (LNG) projects are looking much rosier than a year ago, Trend reports with reference to Oxford Institute for Energy Studies (OIES).
OIES report reveals that the negative margins of LNG prices back in 2020, as a result of the COVID-19 pandemic, seem a distant memory now.
“Between 150 and 200 cargoes were shut in, impacting the market during the summer months. The picture changed dramatically as the impact of the pandemic started to ease and economic recovery brought higher demand and increased prices, pushing the margin back into positive territory in Q3 2020. At the end of 2020 and in early 2021, the very cold weather and a dramatic rise in prices in Asia pushed the margin briefly to an extremely high level. Prices fell back quickly after the Asian spike, but the continuing tightness of the global supply-demand balance led to firm prices throughout the summer of 2021. In August, however, prices started to rise dramatically in both Europe and Asia, seeming to incorporate a large ‘fear’ premium, pricing in another cold winter,” the Institute analysts say.
There were also reports of some short covering by LNG traders in Asia supporting the price, and some traders having large short open positions on TTF which resulted in significant margin calls.
“These short positions needed to be covered by buying on the physical or futures markets, providing short-term price support. In December 2021, the price volatility increased with prices moving as much as 10 per cent up and down in a day on little more than good or bad news and windy or non-windy days in Europe. Prices were further supported as flows were significantly reduced along the Yamal-Europe pipeline from Russia. As we entered 2022, Russia flows declined further. The lower Russian flows were broadly offset by much higher LNG flows into Europe,” the report reads.
The outbreak of war in Ukraine in late February 2022 sent prices in Europe spiralling higher and dragged up Asian spot prices as well.
“Henry Hub prices in the US have also risen with rising demand for LNG exports straining the US supply. This has lessened the LNG margin, but it is still around $20/MMBtu, with the forward curve in double digits for the next couple of years. Clearly, current margins provide an incentive for new FIDs but much lower margins might not. However, it is not just the margin which will be needed for FIDs to be forthcoming. Even if the economics look good, most new LNG developments will still require the backing of long-term contracts.”
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