Explanation: What is behind soaring global LNG prices and the risks ahead

SINGAPORE, Oct. 1 (Reuters) – In less than a year and a half, liquefied natural gas (LNG) prices have risen from a record high to a record high as the market is initially shaken by the impact of pandemic and now unable to keep pace with a global recovery in demand.

Demand jumped amid economic growth and a cold winter in the northern hemisphere followed by a hot summer, while supplies were hampered by production problems. Recent power cuts and blackouts in China due to coal shortages have only exacerbated competition between Asia and Europe for securing energy sources.

This has led LNG prices to hit $ 34 per million UK thermal units this week, down from just under 2mmBtu in May 2020, while European gas prices have risen 300% this year.

HOW IMPORTANT IS SUPPLY-DEMAND INSAPPARENCE?

Gas stocks remain extremely tight in Europe and Asia, which together account for 94% of global LNG imports and over a third of global gas consumption.

Most of the large LNG producers are operating at or near full capacity and have allocated the vast majority of their shipments to specific customers, leaving little chance of a short-term solution.

According to the International Gas Union, only 8.9 million tonnes per year (mtpa) out of a total of 139.1 mtpa of new planned liquefaction capacity are expected to come into service in 2021.

Some of that additional capacity has been delayed by COVID-19-related movement restrictions that have halted or extended construction and maintenance work at several key sites, including Indonesia and Russia over the past year.

So far this year, 288.1 million tonnes of LNG have been loaded for exports worldwide, a growth of just 7% compared to the same period last year, according to data from Refinitiv.

WHAT ARE THE FUTURE RISKS?

Buyers may find it difficult to purchase enough gasoline for replenishment and use. The decrease in wind in Europe in recent times has boosted gas consumption by power plants there, while in China electricity is rationed to industry and some residential users, triggering an increase in imports of LNG.

The current long-term forecast is for a mild winter across much of Asia this year, but the market is concerned that a repeat of the 2020/21 cold snap could lead to a buying spree similar to that of January. which drove up prices.

“In the extreme, it wouldn’t be a surprise if some gas or LNG cargoes could even change hands in the $ 100 / MMBtu range, or ~ $ 580 / bbl in terms of oil equivalent, looking at the soaring US gas market prices, for example, over the past decade, ”Citi said in a note to customers last week.

HOW WE GOT HERE?

Spot LNG fell to an all-time high of $ 1.85 / mmBtu in May 2020, when coronavirus containment measures stifled demand for electricity as did new supplies from large producers like Qatar, Australia and the United States. United States have flocked to the market.

LNG producers have cut back on production, reducing shipments until summer 2020, which has had a lasting impact on global gas stocks. The winter 2020/21 freeze then took many electricity suppliers by surprise, triggering a one-time increase in demand and further tightening gas stocks, just as logistical constraints were slowing delivery times.

These factors and high shipping rates pushed LNG spot prices to a record $ 32.50 per mmBtu in mid-January, although prices returned below $ 10 by the end of the month. .

Prices have since rebounded. European buyers have struggled to replenish their stocks, with a hot summer increasing the use of air conditioners, just as high carbon prices have forced power producers to cut back on coal and burn more gas. Maintenance of gas fields in Norway and lower volumes from Russia also reduced supplies.

Asia’s higher buys on Chinese demand growth and restocking exacerbated Europe’s deficit, leading shipments to Europe through August down 18% from the same period in 2020, according to data from Refinitiv.

This left European gas stocks 50-60% full at the end of the summer, up from 80% at the same time last year. The current wave of replenishment is now fueling soaring gas prices in Europe.

WILL THE SUPPLIES BE COMING?

In addition to project delays related to COVID-19, the global energy sector has shifted away from fossil fuels towards greener energy supplies, which has slowed investment in LNG infrastructure. This has hampered the ability of producers to quickly bring more supply to the market, said Charif Souki, co-founder of US natural gas company Tellurian (TELL.O).

“The world was kind of lulled into complacency because the prices were low for five years so no one felt the need to plan and everyone got very religious about protecting the environment and that’s wonderful – we should be – but we should be looking at what things actually work, rather than just what we hope for, “he added.

Reporting by Jessica Jaganathan in Singapore, additional reporting by Scott DiSavino in New York; Editing by Gavin Maguire and Edwina Gibbs

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