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    From the editor: Normalisation looms for expanding LNG market [Gas in Transition]


LNG prices are likely to remain above the average of recent years not impacted by exceptional events, but will trend down in order to re-stimulate lost demand for the fuel.

by: Ross McCracken

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NGW News Alert, Natural Gas & LNG News, World, Liquefied Natural Gas (LNG), Premium, Editorial, Gas In Transition Articles, January 2024, Market News

From the editor: Normalisation looms for expanding LNG market [Gas in Transition]

Spot LNG prices have continued to move marginally lower in January, despite the threat of LNG carriers (LNGCs) transiting the Red Sea being struck by missiles launched by Houthi rebels in Yemen. Some major users of the Red Sea/Suez Canal route, such as Qatargas, are re-routing ships. 

Around 8% of the world’s LNG trade typically passes through the Suez Canal, but unlike some other strategic maritime chokepoints, ships unwilling to take the risk have alternatives. Taking these will cause delays and tie up vessels on the water, reducing LNGC availability and pushing up shipping costs at a time when both the supply of and demand for LNG are high.

However, not only have spot prices failed to react, but futures prices indicate that traders are expecting a surplus of gas to emerge this summer. 


Changing outlook

This is something of a turnaround as the dominant narrative only a year ago was that the LNG market would stay tight at least until 2025/26, when large amounts of new capacity would come on-stream, primarily in the US and Qatar. As the Ukraine crisis unfolded and Russian exports of pipeline gas to Europe were progressively cut, Europe’s need for LNG was expected to keep prices high.

Given the length of time it takes to get a new LNG project into operation, the number of LNG plants under construction in early 2022, when Russia invaded Ukraine, suggested that new capacity coming on-stream ahead of 2025/26 was not going to be sufficient to meet the jump in European LNG demand. This rose in an extraordinary fashion in 2022 to 170.2bn m3 from 107.5bn m3 the year before and has stayed close to this level in 2023.


Price perspectives

But let’s first get some perspective on prices. In 2009 and 2010, LNG spot prices, as represented by Platts Japan-Korea Marker (JKM), were sub-$10/mn Btu. 

From 2011-2014, they rose strongly in the aftermath of the Fukushima nuclear disaster in Japan. This resulted in the shutdown of all of Japan’s nuclear reactors, which, in 2010, accounted for a quarter of the country’s electricity generation. Japanese LNG imports, which at the time accounted for a third of the global market, jumped. This period, in which the JKM averaged just under $15/mn Btu, should be considered exceptional.

From 2015-2020, prices normalised in the sense that they returned to pre-Fukushima levels, averaging $6.66/mn Btu over the period. The blow to economic activity as a result of the COVID-19 pandemic tipped this average to the downside, although, of all the fossil fuels, gas demand was the most resilient during the pandemic period.

However, LNG prices rose sharply in 2021, to average $18.60/mn Btu, before Russia’s invasion of Ukraine in late February 2022. 

The surge in gas prices in late 2021 reflected an array of factors rather than one traumatic event: a demand rebound from the pandemic, lower Russian gas exports to Europe before the invasion of Ukraine, weak domestic European gas production and limitations on LNG exports, which reduced export capacity worldwide. 

Europe entered Winter 2021/22 with inadequate levels of gas in storage, LNG demand was rising strongly across Asia and had been unusually high through the Latin American winter.

The boom in LNG prices in 2022 to an average $40/mn Btu resulted from Europe’s sudden need for LNG as a result of the sharp decline in Russian pipeline imports following Russia’s invasion of Ukraine. The post-invasion period should also be considered exceptional, noting that it came on top of a period when LNG prices were already at historic highs.

As a result, the expectation that prices would stay strong until the surge in US and Qatari export capacity in 2025/26 remains true. At an average of around $13/mn Btu in 2023 and trading at $11-12/mn Btu in mid-January 2024, prices look low by comparison with 2021 and 2022. But this period, like post-Fukushima, was exceptional. Prices are still high – in fact near double – compared with the non or less-exceptional periods, i.e. pre-Fukushima and from 2015-2020.


What now?

The question now is whether this current price strength will be maintained and to what degree. One factor which has probably been under-estimated by the gas industry and its observers was the potential for unusually warm weather, the result, according to meteorologists, of the switch from La Niña to El Niño weather conditions and climate change. 2023 has been confirmed by the EU’s Copernicus Climate Change Service as the warmest on record. 

The weather has an enormous impact on gas demand. True, it works both ways, warm winters reduce demand for heating, while hot summers increase demand for air cooling. But these two factors are not equal. A one degree increase in winter temperatures produces a much bigger reduction in heating demand than a one degree rise in summer temperatures does for cooling.

Warm weather has helped Europe out massively in managing its loss of Russian pipeline gas and has also served to dampen gas and LNG demand across the globe. 

Europe has been able to keep gas inventories at exceptionally high levels by seasonal comparison throughout this winter. This means that as Spring and Summer beckon, restocking requirements will be low, which will keep a lid on the region’s demand for LNG.

As inventory levels have benefitted from a combination of price-induced demand restraint and warm weather, LNG demand in 2024 is expected to remain relatively stable rather than surging upward. 

Record levels of imports in December into Asia have been met without much price reaction because, unlike winter 2021/22, supply is strong and there was a hangover of cargoes from the summer, which struggled to find a home in near-full storage facilities.

Moreover, while gains in LNG export capacity have been relatively small, as forecast, they are not non-existent. Global export capacity has increased from around 390mn t/yr in 2022 to just over 400mn t/yr in 2023 and could rise to 418mn t/yr in 2024 before some of the larger US projects start coming on-stream in the second half of 2025.


A fine balance

This suggests something of a fine balance in terms of price this year. High inventory levels coming into summer represent an important downside underlay, but lower prices should prove a demand-side stimulant as seaborne gas regains price competitiveness. 

Commodity analyst Kpler has reported Asian LNG imports in December at a record 26.6mn t, driven by China, but also record exports from both the US and Australia, while Qatari exports also rose.

While some of the new LNG export capacity will be consumed by recent market entrants, the key to the supply/demand balance is likely to be the degree to which European gas demand recovers, particularly in the industrial sector, and whether more price-sensitive markets, for example in South Asia, return to more robust levels of LNG consumption on the back of weaker prices. 

The likelihood is that LNG prices will trend down but stay above the average of recent historical periods not impacted by exceptional events. Further downside pressure is likely from 2025 as the export side of the market starts to expand at a much faster rate than in 2022-2024.

But the further one looks ahead, the shakier forecasts become and as, demonstrated by the past decade and a half, major weather, health or geopolitical events can have dramatic impacts. With tensions very high in the Middle East and Ukraine still at war with Russia, forecasts based on supply and demand fundamentals may once again be blown far off course by unforeseen events.