After Asia’s winter spot price spike, Europe has been sustaining global LNG prices, and is increasingly the battleground for global LNG price formation.
Post-pandemic demand recovery, limitations on Russian pipeline exports and unseasonably cold weather, particularly in April, have all contributed to a tighter market, pushing European storage levels down to multi-year lows.
The key cause of the price surge, however, has been the strengthening economics of coal-to-gas switching.
Since November last year, carbon prices and coalprices have increased 33% and 26%, respectively, boosting European TTF gas prices by $3/mmbtu.
The Asian market is tightening too
Demand for LNG restocking in Northeast Asia was particularly strong in the 1st quarter and is still far below levels seen this time last year.
Restrictions on coal usage have seen rising gas burn volumes in the power sector in South Korea and Taiwan.
Demand across South and Southeast Asia has either rebounded or started to grow again.But it is China where much of the growth is now materialising, with coal-to-gas switching policies gathering pace once more.
This has resulted in a demand surge of 2.2 Mt since the start of the year, 8% more than in 2020.
We expect this strong growth to continue as domestic production growth lags domestic demand growth.
Strong Asian LNG demand means that the Japan spot price is now trading at more than $10/mmbtu for deliveries in June, a premium of more than $1.5/mmbtu over TTF.
Market dynamics will remain tight for the rest of the year
Global LNG supply will be stronger this summer than last, with an additional 16 mmtpa supported by the full utilisation of US LNG.
However, demand for restocking and strong coal-to-gas switching economics will bolster European prices over the summer as well – with European carbon prices the single biggest risk here.
Winter will see market dynamics get increasingly tight.
Lower winter starting inventory in Europe combined with high seasonal Asian demand will result in greater competition for Atlantic LNG, also from the US, putting pressure on prices.
A repeat of last year’s extreme price crunch in Japan isn’t expected, but cannot be ruled out.
Russian-German pipeline to shape market dynamics in 2022
LNG demand growth in Asia will slow as the economic recovery decelerates, coal and nuclear capacity will increase in Japan and S.Korea, and more offshore domestic supply will be available in India.
Asian LNG demand will increase by just 12 mmtpa in 2022 compared with 19 mmtpa in 2021.
At the same time, global LNG supply will grow 18 mmtpa, supported by the commissioning of Sabine Pass T6, Calcasieu Pass and Tangguh LNG T3.
Consequently, there will be more LNG available to Europe in 2022, some 6-7 mmtpa, or 9% more than in 2021.
The key element that will shape market dynamics in Europe in 2022, however, will be the ramp-up of the 55 bcma Nord Stream 2 pipeline from Russia to Germany, now expected to be commissioned this winter.
Next summer TTF prices could be below $6.5/mmbtu, some 30% lower than this summer.
Market fundamentals suggest further global LNG market tightening to 2025
With LNG demand in Asia continuing to grow and global LNG supply growth set to slow, competition for Atlantic LNG will intensify, reducing LNG availability for Europe.
And with carbon prices remaining high, supporting demand, and domestic production continuing to decline, Europe will increase its reliance on Russian pipeline gas.
The global gas/LNG oversupply that has affected the market since the end of 2018 has come to an end ‒ at least until the next wave of post-final investment decision (FID) LNG supply comes to market after 2025.