Gas crisis lands LNG cargo market in hands of energy giants

September 27, 2022 (MLN): Rocketing LNG cargo prices have squeezed out dozens of smaller traders, concentrating the business in the hands of a handful of international energy majors and top global trading houses.

This grip is not expected to ease until 2026 when more liquefied natural gas (LNG) starts to materialise and lower prices, adding to supply worries for poorer states reliant on it to generate power and driving up costs for big Asia economies.

The global LNG market has more than doubled in size since 2011, ushering in dozens of new entrants and the expansion of smaller players in Asia. In recent years, smaller traders accounted for 20% of LNG imports in China alone.

But a spike in spot LNG cargo prices to $175-$200 million, from around $15-$20 million two years ago, has had a seismic impact on physical trading activity for many smaller players.

The capital needed to trade the market soared after benchmark LNG prices rose from record lows below $2 per million British thermal units (mmBtu) in 2020 to highs of $57 in August.

In July, Japan's Nippon Steel Corp, the world's second-largest steelmaker, purchased an LNG shipment at $41/mmBtu. LNG spot prices price stood at $40.50/mmBtu then.

Prices have recently eased, hitting $38/mmBtu on Monday, but analysts say they remain at levels that can be linked with an ongoing energy crisis.

"The biggest challenge facing every market participant right now is credit," said Ben Sutton, CEO of Six One Commodities, a U.S.-based LNG merchant that had to scale down operations after prices soared in the third quarter of 2021.

Short term market volatility has heightened risk for traders, with geopolitics rather than fundamentals driving price moves.

"The ballooning of LNG cargo values, along with the spike in volatility, has ... put quite a strain on those players operating with smaller balance sheets," said Tamir Druz, managing director of Capra Energy, an LNG consultancy.

In Asia, a trading executive told Reuters some smaller players had left offices "dormant" in Singapore's trading hub, while second-tier Chinese traders and some Korean firms scaled down activity due as finance became harder to secure.

"LNG has gone back to be the commodity of the rich," Pablo Galante Escobar, Global Head of LNG at energy trader Vitol, told this month's international Gastech conference in Milan.

Reuters