Dwindling crude oil price may upset push for Asia LNG spot market

The falling crude oil prices look set to delay a push by Asian buyers of liquefied natural gas (LNG) for a pricing mechanism to kickstart spot trading of the world’s fastest growing energy source.

Typical LNG supply contracts often span decades and are based on the price of oil, the world’s most traded energy product. As a result, rising oil prices in recent years have increased the cost of importing oil-linked LNG for power utilities in Japan, South Korea and China.

But the utilities have not been able to fully pass on the higher cost to end-users, constrained by prevailing electricity prices. That has led to financial losses, and in the case of Japan, contributed to its record trade deficit.

In response, LNG buyers have been seeking to develop a viable spot market for LNG to de-couple from oil.

The first sea-borne exports of US shale gas are expected in Asia in 2015, while a wave of Australian output is also coming on stream over the next four years, giving a boost to spot buyers by increasing supply.

Spot pricing mechanisms do exist, in the form of assessments by price reporting agencies like Platts. But they lack liquidity and a parallel futures market that can be used for hedging.

Japan’s efforts to create a new LNG spot price benchmark have so far failed, with a forward contract launched in September on the Japan OTC Exchange yet to attract a single trade. Traders say they support the contract, but cite a lack of spot market liquidity as the main reason why it hasn’t taken off.

Another contender is Singapore, already Asia’s main oil trading hub, which is now building LNG storage facilities, while the SGX Singapore stock exchange plans to launch LNG futures, but has given no timeframe.

In China, where soaring demand is expected to rival established buyers Japan and South Korea by the end of the decade, Shanghai also wants to become an LNG trading hub with plans to offer futures contracts.

Tumbling oil prices, however, could put a dent in Asia’s ambitions to establish liquid and independent LNG trading. Most energy buyers welcome the near-40 percent drop in oil prices since mid-June, but as oil becomes cheaper, the long-term LNG deals linked to it grow more attractive.

LNG also faces another pricing model once US LNG exports to Asia ramp up in the coming years. US LNG will be based on the Henry Hub gas price index , which will provide an alternative for buyers to oil, although it will make them more dependent on price movements within the United States, such as volatility caused by extreme North American weather.

However, LNG suppliers still see a role for spot pricing.