JAPAN CUTS PRICES BY 38%
Contract prices for liquefied natural gas (LNG) in Japan may drop 38% through 2016 amid a slump in oil, weak economic growth and the potential restart of nuclear plants, according to Australia & New Zealand Banking Group.
LNG contracts for the world's biggest buyer of the fuel are forecast to fall to $10.30/MMBtu this year from $16 in 2014, ANZ said in a note Wednesday.
Prices are projected to extend declines to settle at about $10 in 2016, the bank said, predicting that demand may weaken further this year as the nation's idled nuclear reactors restart.
Japanese utilities turned to fossil fuels such as LNG to compensate for the loss of atomic power after the Fukushima disaster in 2011, contributing to a doubling of gas prices. The nation's long-term purchase agreements are typically linked to the cost of Brent crude, and contract prices are not expected to fully reflect the drop in oil until later in the second quarter of this year, according to ANZ.
"The weakness in energy markets is threatening to derail LNG's emergence as the preeminent energy source in Asia," Daniel Hynes and Natalie Rampono, commodity strategists at the bank, wrote in the note. "Increased competition from cheaper oil and coal, and weak overall industrial demand has come at a time when a surge of supply is hitting the market."
Brent, the benchmark for more than half of the world's oil, slumped more than 48% last year amid a global glut of oil. The March contract was 3 cents higher at $56.46/bbl on the London-based ICE Futures Europe exchange at 4 p.m. in Sydney after ending 2014 at $57.33.
Japanese consumers will probably minimize volumes as much as possible with current contract prices around $12 to $14/MMBtu, the bank said. Long-term agreements can be priced off by as much as 15% of oil prices, according to a Jan. 5 report by Bloomberg New Energy Finance.
Lower contract-buying may drive additional purchases of spot cargoes and push prices higher, ANZ said. Spot LNG prices fell by Feb. 9 to $6.65/MMBtu, the lowest level since at least June 2010, according to data from New York-based Energy Intelligence's World Gas Intelligence publication.
While Japan's economic growth remains "anemic," the nation still needs more than 18 million tpy of LNG over the next few years, according to ANZ. With oil-indexed prices pushing lower, this shortfall will probably be met from existing uncontracted volumes from Australia or Qatar, it said.
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