Global markets have been hit hard by the economic downturn as a direct consequence of the Covid-19 pandemic. LNG prices were among the commodities which decreased sharply as consumption evaporated when entire industries and societies went into lockdown. During the past several months, however, prices have rebounded strongly, resembling a rollercoaster. The situation was especially dire for East Asian customers who found it hard to buy affordable cargoes.
Therefore, buyers are already preparing for the next winter season. China’s Sinopec, for example, has purchased 35 cargoes to be delivered starting in June until February 2022. Chinese buyers are hardly alone. Importers in Japan and South Korea are likely to follow as the market remains tight. It is uncommon though that winter cargoes are bought on such a scale in April already.
The price difference within one year is remarkable and attributable to several factors. During the summer period of 2020 when Covid-19 was hardly under control anywhere in the world, LNG spot price decreased to record lows of $2 MMBtu, which is hardly enough to pay for production at some locations. The peak was reached in January this year after surging to $32.50 MMBtu caused by three factors. Related: Oil Rises To Seven-Week High On Strong Remand Recovery
First, extreme cold weather swept over northeast Asia where demand skyrocketed. The area is densely populated and home to the world's three largest importers: China, Japan, and South Korea. Second, the region enjoyed strong economic performance due to containing the spread of the Coronavirus relatively well. Lastly, several unplanned outages meant that production capacity was below normal levels. The combination of these three factors was a perfect storm culminating in record prices in January.
While skyrocketing prices are damaging to consumer confidence and sustaining supportive government policies, it seems that LNG is spared due to the lack of alternatives in the region. Again, three factors ensure that Asia will account for 95 percent of global LNG growth until 2022. First, economic performance is the best indication for import growth and East Asia is set to remain to expand. Second, the lack of domestic alternatives to LNG, such as pipelines (except for China), ensures that East Asia remains dependent on shipped
imports. Third, supportive policies will remain in place and drive expansion.
In this regard, Beijing's actions have considerably influenced the market. Rampant air pollution created the need for China’s coal-to-gas policy which has set the country on course to overtake Japan as the world’s largest importer of LNG besides enjoying considerable pipeline connectivity with Central Asia and Russia.
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What does Asia’s buying spree mean for LNG prices in the short term? The quick answer is that prices, most likely, will remain high. Though not skyrocketing as in January. The market remains relatively tight as economies enter a period of thaw as vaccination programs progress, in the rich world at least. Although Brazil and India suffer from major outbreaks, the world's biggest importers in Europe and Asia are likely to recover economically. Thus driving demand for LNG.
Second, demand will also be high regarding European countries. The continent, also, endured a relatively cold winter. This means that storages are unusually low for the time of the year. These need to be refilled which could partly be done with LNG. Although Europe enjoys good connectivity through pipelines with major natural gas producers in Russia, Norway, and North Africa, LNG's market share has been rising steadily for years.
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Asia's unusually early buying spree is well needed. Although LNG provides flexibility to the market, it can erode the security of supply for customers. Therefore, expect demand to remain high throughout the summer and into the next winter heating season.
By Vanand Meliksetian for Oilprice.com
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