Asian LNG buyers have exercised the downward quantity tolerance option, which allows LNG buyers to receive fewer cargoes from their original contract volumes, as spot LNG prices continue its trajectory below that of contracts linked to crude oil, market sources said earlier in the week.
Although there are certain limitations of exercising these options, this trend could result in greater spot availability as sellers seek buyers in the spot market for these term volumes, according to market sources.
Platts, part of S&P Global Commodity, assessed April JKM -- the LNG benchmark price -- at $8.218/MMBtu Feb. 29.
April ICE Brent crude futures settled at $83.62/b Feb. 29, which indicates typical oil-linked contract prices are around $11.3/MMBtu, as the slopes of existing contracts are around 13.5% to Brent prices, putting spot cargoes about $3/MMBtu lower than oil-linked cargoes.
The $3/MMBtu difference is big enough for term buyers to switch to buying spot cargoes as long as certain market and contractual conditions were met, several market sources told S&P Global.
"To exercise DQT, firstly, we need to have a contract that allows us to use DQT after the contract year starts [in case of exercising DQT after the contract year starts]. Secondly, stock levels are appropriate [so that there is enough space in storage]. Thirdly, JKM is lower than term prices. Those conditions seldom come together [until, at the current moment]," a Japanese utility source said.
As a result, the Asian market has been seeing LNG suppliers offering more spot cargoes via tenders or in the bilateral market that were originally supposed to be supplied to term buyers, trade sources said.
Projects affected were heard to be mainly those in the Asia-Pacific region that have majority of long-term contracts linked to crude oil prices, such as Australia, Russia and Malaysia.
One example was Russia's Sakhalin Energy offering in late February four spot cargoes for April loading, even though the company typically offers one to two spot cargoes a month, market sources said.
"The extra two cargoes seem to be those resulting from DQT," a trader based in Asia said.
Market sources said other suppliers were offering spot cargoes more actively.
LNG buyers typically set the annual delivery program, or ADP, which is a cargo delivery schedule for the coming contract year.
While the main term period is from January to December in Asia, Japanese buyers set the program for March-April.
Japanese utilities said they are almost concluded with the ADP except for Malaysia, while they are likely to settle the ADP with Malaysia by mid-March.
Limitations to exercise DQT option
There are certain restrictions in exercising DQT options, market sources said.
First, not all term contracts have DQT clauses. For example, certain contracts with smaller volumes, such as those lower than 2 mtpa, might lack this flexibility, market sources said.
The Japanese utility source said: "We don't exercise DQT to raise spot volume for an economic reason -- technically, it is possible, but we have to start negotiation earlier, like autumn last year, but at that time, term prices were still lower."
Buyers and sellers typically need to talk and settle cargo reduction three to six months before the contract year starts, market sources said.
Another Chinese source said the DQT negotiations are normally held during October for both parties to discuss for the next contract year.
If buyers want to exercise DQT promptly, the contracts have to also allow buyers to exercise DQT after the contract year starts, market sources said.
Meanwhile, there are contracts that allow buyers to notify sellers to exercise DQT a few weeks before the loading time, another trader said.
JKM drops to the pre-Russia-Ukraine war levels
Asian LNG spot prices have been on a downward trend, and they are expected to remain weak as the April-May shoulder season is on the corner, sources said.
The JKM prices have been hovering around close to a three-year low since mid-February. The April JKM dropped to $7.981/MMBtu Feb. 26, the lowest since April 15, 2021, when JKM was assessed at $7.563/MMBtu, S&P Global data showed, before it edged up to $8.218/MMBtu on Feb. 29.
While China's second-tier importers are buying spot cargoes to take advantage of low prices, the market still has enough supply, market sources said.
Market sources said there were few bullish factors to support the market in the first half of 2024, with inventory levels remaining comfortable, as well as downstream gas and power demand languishing in most consumer markets.