In less than a year and a half, LNG prices shifted from record lows to record highs, with the market initially affected by the repercussions of the Corona pandemic and its inability to keep pace with the global recovery in demand.
Demand jumped thanks to economic growth in addition to cold winter In the Northern Hemisphere a sweltering summer followed, while supplies were hampered by production problems. The restrictions and recent power cuts across China due to coal shortages have exacerbated competition between Asia and Europe for energy security.
This pushed LNG prices to $34 per million British thermal units this week, compared to less than $2 per million British thermal units in May 2020, while European gas prices have jumped 300 percent since the beginning of this year.
To what extent does demand not match supply?
Gas stocks remain extremely scarce in Europe and Asia, which together account for 94 percent of global LNG imports and over a third of global consumption.
Most of the major LNG producers are operating at or near full capacity and have allocated the majority of their shipments to specific customers, leaving little chance of fixing the situation in the short term.
According to the International Gas Union, only 8.9 million tons per year of the total 139.1 million tons per year of new liquefaction capacity planned for 2021 is expected to be available.
The additional capacity has been delayed due to travel restrictions to curb the spread of COVID-19 that have halted or disrupted construction and maintenance work at several key sites, including Indonesia and Russia, over the past year.
Refinitiv data showed that since the beginning of the year, 288.1 million tons of LNG have been loaded for export globally, an increase of only seven percent over the same period last year.
What are the future risks?
Buyers may find it difficult to purchase enough gas to be re-stored and used. The recent weakness of the winds in Europe has led to an increase in the use of gas by power plants there, while energy use is being rationalized for industries and some residential areas in China, which led to a jump in LNG imports.
Current long-term forecasts point to a mild winter in most of Asia this year, but markets fear that a repeat of the cold snap that occurred in 2020-2021 may lead to a buying spree similar to the one that occurred in January and led to an increase in prices.
“In contrast, it would not be surprising if some cargoes of gas or liquefied natural gas were trading in the range of $100 per million British thermal units or around $580 per barrel of oil equivalent, based on a follow-up to how they rose,” Citi said in a note to its clients last week. Prices in the US gas market over the past ten years, for example.
How did we get this far?
Spot liquefied natural gas prices fell to a record low of $1.85 per million British thermal units in May 2020, when measures to combat the spread of the Corona virus curbed energy demand as new supplies from major producers such as Qatar, Australia and the United States poured into the market.
LNG producers reduced production and shipments during the summer of 2020, which had a lingering impact on global gas stocks.
The frigid winter of 2020-2021 caused supply shortages for many electricity providers, triggered an increase in spot demand and further reduced gas stocks, while logistical constraints slowed delivery times.
These factors, in addition to high freight rates, led to a significant increase in the spot prices of liquefied natural gas to a record level of $ 32.50 per million British thermal units in mid-January, although prices returned to less than ten dollars at the end of the same month.
But then the prices went up again. European buyers are struggling to rebuild stocks amid a hot summer that has increased the need for air conditioners, while high carbon prices have forced power plants to cut back on coal and burn more gas.
Supplies also fell due to maintenance of gas fields in Norway and lower shipments from Russia.
The deficit in Europe was exacerbated by increased purchases from Asia thanks to the growth of Chinese demand and the rebuilding of inventories, which led to a decline in shipments to Europe in August by 18 percent compared to the same period in 2020, according to Refinitiv data.
This led to the fullness of European gas stocks between 50 and 60 percent until last summer, compared to 80 percent in the same period last year. The current wave of restocking is fueling the increase in gas prices in Europe.
Are supplies up?
Far from project delays related to the COVID-19 pandemic, the global energy sector’s shift away from fossil fuels and toward less polluting energy supplies has slowed investment in LNG infrastructure.
This has hampered the ability of producers to get more supplies to market quickly, said Sherif Souki, co-founder of US Natural Gas Company Tellurian.
He added, “The world was somewhat satisfied with the low prices for five years, so no one felt an urgent need to plan and everyone became very committed in terms of protecting the environment, and this is wonderful and we should be, but we also have to know the things that pay off as well and not what we hope Simply it.”