Over the last several months there has been much discussion about the
impact of falling crude oil prices on the liquefied natural gas market.
The conventional argument goes something like this: lower crude prices
are making oil-linked LNG contracts cheaper and are putting pressure on
the spot market as these contracts increasingly undercut spot prices.
At first glance, this argument appears quite compelling. On January
14, 2015, the price of Platts-assessed Dated Brent was $45.73/b. For
buyers using 14.5% slope to crude, not uncommon in the Asia-Pacific
market, that would equate to an LNG price of just $6.63/MMBtu. By
comparison, the Platts JKM price (a spot index for the Asian LNG market)
was assessed significantly higher at $9.38/MMBtu on the same day.
Taking a deeper look at the market, a
more complex picture emerges in which crude prices have had, at best, a
minor and mostly psychological impact on the spot market for LNG. In
fact, during four of the last five months, the average price of the JKM
has undercut the price of oil-linked contracts. The key to this mystery
is, of course, in the details of contract-pricing.
For most buyers in Japan and South Korea, the world’s largest LNG
consumers, the price of an imported cargo is calculated at a 14.5-15%
slope to crude on a lagged “3-0-1” pricing formula. That sounds
complicated. However, each of the digits in this formula is simple,
signifying, respectively, the number of months used for averaging, the
number of months to count back to the end of the lag period, and the
number of months being priced.
No comments:
Post a Comment