The year 2020 is already unforgettable in many ways. The Covid-19 pandemic brought the world to a standstill. With the economy on hold, energy consumption has plummeted including demand for LNG. The price of the supercooled fuel reached unprecedented lows in the spring of 2020. Within a year, however, the revitalization of the market is a fact. Prices in especially Asia have reached astronomic heights due to a combination of factors. The most important LNG buyers-markets are in Asia and Europe. The latter, however, also enjoys a well-developed crossborder pipeline infrastructure that connects producers in Russia, North-Africa, and the Caspian to consumers. Asia, on the other hand, is much more dependent on LNG. Therefore, the top three largest importers are all Asian: Japan, China, and South-Korea.
The rise in LNG prices has several explanations. First, economic activities have remained relatively strong in Asia throughout the year. China was the first country to experience a lockdown in February 2020 due to the spread of the Coronavirus. Other East Asian countries also implemented rapid and aggressive measures to mitigate the health crisis. The economy experienced a rebound while most countries were still grappling with the pandemic. Demand for commodities such as LNG, therefore, has remained strong.
More important, however, is the cold winter weather that has hit East Asia. China currently is facing a cold spell not seen since 1966. Utilities in Japan and South Korea face similar issues as inventories are drained at record speeds and demand is skyrocketing.
Asia’s LNG benchmark, the Japan-Korea Marker, rose to $21,45 on Friday which is the highest since S&P Global Platts started registering in 2009. According to Richard Holtum, global head of LNG and gas at Trafigura Group, “LNG prices have had a roller coaster year. This is evidence of the increased seasonality and volatility for the fuel increasingly used together with renewables.”
Another factor that has exacerbated the situation as prices have soared sevenfold, is driven by production losses. Major producers in Australia, Malaysia, Norway, and Qatar are facing challenges in maintaining capacity that has driven up prices even further.
According to Chong Zhi Xin, a director at consultancy IHS Market, “buyers with no alternatives are now paying top-dollar for prompt cargoes in January.” The market has become extremely tight in the short term.
The perfect storm hitting LNG markets is also exacerbated by problems in the shipping market. Over the past few weeks, the shipping rates have risen between 15 and 35 percent to more than $150,000 a day. It is a simple supply-demand equation where the remarkable rise in prices has reduced the availability of ships.
While prices have soared in Asia, Europe is also feeling the pinch despite its cross-border pipeline infrastructure. Cold winter weather in general and Covid-19 have increased consumption as people remain inside. The high prices in Asia have echoed through Europe where the gas benchmark hit a two-year high.
However, it is uncertain whether prices will remain high in the long term. Although the beginning of the end of the pandemic is in reach due to the arrival of vaccines, long-term economic predictions remain bleak. It could take years before the economy and demand for LNG are what they were before the pandemic.
Russia's export to Europe, for example, hovered around 200 bcm for the last couple of years. For 2021, however, the expectation is that ‘just’ 170 bcm will be exported with an increase to 183 bcm in 2022. This shows the dire state of the market in at least Europe in the short to medium term.
The room for growth in Asian markets makes these countries even more important for LNG exporters. China already is on the brink of unseating Japan as the world's largest importer. The expanding market is not limited to East Asia. Countries in the south, such as India and Pakistan, are also gaining importance. The LNG market, however, remains highly volatile especially as the economic consequences of the pandemic are not yet fully understood.
By Vanand Meliksetian for Oilprice.com
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