Jessica Jaganathan

SINGAPORE, (Reuters) – Liquid gas sellers are seeking credit letters from businesses they do business with in order to ensure they can afford the price hikes that will occur due to rising global gasoline prices. Industry sources claimed this was done to protect their credit limit.

LNG is a highly liquid market that has relied heavily on huge players and deep pockets. But, defaults are rare, with around 20-30 new companies entering the market every two to three years.

The rise in Asia’s demand and the global energy transition, which saw many countries like China switch from coal to natural gas, attracted these companies.

Seven industry sources revealed to Reuters that credit limit breaches are occurring due to a worldwide price rise. This is as demand increases following the COVID-19 crises and supply tightens.

The highest spot LNG price in Asia was $34.47 for a million British thermal units (mmBtu), up nearly 100% from one month ago, and almost 500% over the previous year.

The typical cargo of 3.4 trillion British thermal unit LNG is worth $100 million to $120 million, as opposed with $20 million late February.

To ensure that the banks back the purchase, super-chilled fuel sellers are now seeking letters credit from trading companies and end-users when selling cargoes.

Sources requested anonymity because they weren’t authorized to address the press.

Letters of credit are issued by banks on behalf buyers to guarantee payment within a set time period.

The most common way to conduct LNG spot trading is open credit. This refers to preapproved loans between the bank, the borrower, that can be used repeatedly up until a specific limit.

Graphic: Key LNG prices, https://fingfx.thomsonreuters.com/gfx/ce/gkvlgwekmpb/KeyLNGPrices.png

LNG cargoes can be purchased on open credit, which is a big difference from oil. Large companies often have assets and large buyers.

Sources said that some traders or buyers are feeling squeezed by the current market price. Sources said that credit limits can vary between companies and they would only be able to buy one cargo if their total insurance was $150 million.

This price surge is quite an increase from last May’s record lows at below $2/mmBtu. Lockdowns slowed consumption. Some buyers also requested that delays be made in cargo deliveries.

According to Reuters sources, sellers are concerned about future volatility. One source who is familiar with contract negotiations said that some companies requested letters of credit (LCs), which would be included in purchase and master sales agreements.

The source stated that LCs used to be requested only by those buyers with poor credit ratings. Now it is being done across all companies, except perhaps for excellent credit-rated businesses.

According to one Singaporean LNG trader, even more traders looking for credit were asked by the bank. This would reduce trade appetite and worsen supply shortages.

Reuters reached out to six major trading houses in order for their comments, but they did not receive an immediate reply.