LNG prices rebound strongly in 2023

Gas prices collapsed in Europe over the winter, as mild weather and weak industrial demand ensured that gas inventories remained at comfortable levels. In recent weeks, spot LNG prices have fallen, allowing South Asian buyers to re-enter the market from which they were shut out last year amid soaring prices. Demand in Asia has been subdued this year so far, but the powerful driver of energy markets – China – has yet to show a path to a strong recovery in gas demand.

The decline in Chinese demand in 2022 provided Europe with some help. Last year, China imported 87 billion cubic meters of LNG, down 20 percent year-on-year and the weakest annual import volume since 2019. However, the easing of corona measures, and the introduction of several support measures to help the local real estate sector, is expected to lead to a recovery demand this year. Ultimately, however, Chinese demand represents a major uncertainty for the global LNG market. It is likely that we will see an increase in demand, but it is difficult to gauge how strong it will be this year. Many analysts expect Chinese demand not to return to 2021 levels. Instead, they expect more modest growth of just over 10 percent from last year. In recent weeks, buying activity has slowed as the Chinese New Year holiday approaches, and delivery prices to North Asia have fallen to their lowest since September 2021.

Meanwhile, Europe continues to welcome LNG shipments, despite its comfortable stocks, thanks to a mild start to the winter heating season, falling demand in the industrial sector, and energy savings as bills rise. However, China could influence European gas storage – the timing of filling for next winter.

This winter, Europe is in better shape than many expected just a few months ago. It is also in a much better position in terms of gas inventories than the five-year average, thanks to mild weather for most of December and January. But before next winter, if Chinese demand rebounds, Europe could face stiffer competition when stockpiling.

At the moment, the Asian LNG market looks more resilient than it did a few months ago, and prices fell for the sixth consecutive week in the week ending January 27, to $19.50 per million British Thermal Units, which is down 11.4 percent from the week. which preceded it, according to industry sources reported by “Reuters”. In the four weeks between January 1 and January 27, spot LNG prices in Asia fell 34 percent.

This drop – due to lower gas prices in Europe and the Chinese New Year holiday – has spurred LNG customers in South Asia, such as Bangladesh, Thailand and India, to return to the spot market that they abandoned a year ago amid rising prices. In general, buyers in South Asia prefer lower LNG prices. But the market has not yet witnessed economic growth and the volume of Chinese LNG imports is still uncertain. The reopening of China and the expected rise in energy demand, including LNG, will raise prices in Asia again, and competition between Europe and Asia could intensify to attract spot LNG shipments with flexible destinations.

In the past year, Europe has become the main destination for spot LNG shipments. At the same time, market volatility and uncertainties and concerns about energy security have prompted an increasing number of buyers to seek long-term contracts, including buyers in Europe who were previously reluctant to secure long-term supply because of the EU’s climate ambitions.

Last year, gas consumption in China fell 0.7 per cent, the first annual decline in demand in four decades, according to the International Energy Agency. China’s imports of liquefied natural gas declined, much more than the demand for gas, and Japan returned to first place as the largest importer of liquefied natural gas in the world. The agency said, in a report in November, that the decrease in China’s imports “was a major factor in increasing the availability of LNG in Europe to compensate for the decrease in gas imports from Russia.” The agency added, if China’s imports recover in 2023 to their levels in 2021, this rise will represent more than 85 percent of the expected increase in global LNG supplies. The agency noted that Europe could face a supply gap of up to 30 billion cubic meters during the main summer period to refill gas storage sites in 2023. However, the comfortable level of gas stocks in Europe has eased fears of an immediate major crisis and made the prospect of gas rationing less likely. .

Restarting the Freeport terminal (20 billion cubic meters per annum) could provide some relief to the tightening LNG market, especially if we see stronger-than-expected Chinese demand. There appears to be some progress on the regulatory side to get the terminal back up and running, but the market may have to wait longer for exports to resume. LNG has been, and will continue to be, a major alternative source to replace declining Russian pipeline supplies.

Global LNG markets will remain tight this year, swelled by increased demand from China after the lifting of COVID-19 measures. However, many analysts believe that sufficient quantities of LNG will still be available to Europe, albeit at higher prices that reflect the stiff competition with Asian buyers. For its part, China continues to invest heavily in gas infrastructure, as LNG import capacity is expected to jump 20 percent, to 135 million tons per year by the end of 2023, according to Wood Mackenzie. It is possible that the recovery of the Chinese economy will allow the withdrawal of LNG supplies away from Europe next winter. With this level of investment, China is now the global LNG engine.