Global LNG-Asia demand slump prompts distressed sales

By Oleg Vukmanovic

LONDON, Oct 5 (Reuters) - Asian spot prices of liquefied natural gas (LNG) lost more ground this week as weaker import demand across key winter delivery periods forced some producers to sell distressed cargoes at knockdown prices.

Hemmed in by economic slowdown in China, bulging inventories at Japanese terminals, mild weather and shrinking spot trade, Asia's stubbornly low intake has been denting expectations of a recovery as healthy stockpiles keep a lid on demand.

"A few people are being caught a bit long on supply and that explains the distressed cargoes," one LNG trader from a European utility said. "December was the hope but prices there are also losing ground," he added.

A distressed cargo, like the one sold to South Korea's Kogas

this week, is typically heavily discounted to prevailing market rates owing to exceptional conditions, such as a desperation to sell.

Distressed, non-repeatable trades ordinarily don't influence market prices.

South Korean utility Kogas secured the distressed cargo for late-November delivery at $12.50 per million British thermal units (mmBtu), one trader said.

But the Asian spot market price for November delivery was pegged at about $12.75/mmBtu, down from just above $13/mmBtu last week.

The trading wing of EDF Energy sold a cargo to a Japanese utility for early December delivery at below $13.00/mmBtu this week, a trading source said.

"I understand that the bids for December are now between $12.70/mmBtu and $12.80/mmBtu," the source said, indicating a sharp price cut compared with earlier levels.

Buyers are keen to take advantage of falling prices and some like India are even demanding discounts associated with distressed cargoes, or threatening to back out of deals.

Prices have fallen rapidly after hitting a high of around $18 per mmBtu in May, when North Asian buyers were stocking up with spot supplies ahead of peak summer and winter demand periods.

Demand could still pick up on winter restocking in the coming months, market sources said.

However, Japan's meteorological agency forecast a milder to normal winter this year, which would likely depress demand for LNG from the world's top importer.

LNG has been compensating for the closure following the Fukuishima nuclear crisis of most of Japan's nuclear reactors which, prior to the earthquake and tsunami of March 2011 supplied about a third of the country's power needs.

Industry insiders have been watching for signals of new nuclear reactors coming online. Only two of Japan's 50 commercial nuclear reactors are on line and no more are likely to restart until next summer.

Japan's Electric Power Development said this week it was set to resume the construction of the Ohma nuclear power plant in northern Japan by the end of the year.

The restart of coal-fired plants damaged by the tsunami could also reduce the demand for LNG.

Japan's Tohoku Electric Power Co said last week it expected commercial operations of two coal-fired units at its earthquake-hit Haramachi plant to start by spring next year,

Sluggish demand for spot LNG has also resulted in a decline of LNG tanker rates to around $125,000 per day, down about 18 percent from highs earlier this year, according to Waterborne analysts.

In Europe, British prompt gas prices remained firm on Friday morning despite rising Norwegian supplies leaving the system oversupplied.

Rising UK gas prices this week have further narrowed the spread between Asian and Pacific LNG markets down to a couple of dollars, restricting cross-basin trade that a few months ago featured heavily in shipping patterns.

Given the minimal price difference between regions, shipping costs largely prohibit cargo diversions from Europe to Asia.

In the United States, U.S. natural gas futures turned mixed on Friday, with front-month contracts lightly pressured by Thursday's bearish storage report and forecasts for mild mid-month weather, while colder days expected next week helped limit the downside.

(Editing by James Jukwey)

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Keywords: MARKETS LNG/