Competition for gas cargoes is expected to intensify in the coming months, with Europe’s reserves at their lowest level in 15 years. Even worse: prices are expected to rise
A global race for liquefied natural gas (LNG) cargoes risks driving prices even higher. Europe needs to secure more supplies than usual for the winter, while buyers in Asia are willing to pay much more than in the past. The price of LNG has already reached multi-year highs, having more than doubled since the outbreak of the US-Iran war. Platts JKM, the benchmark for the Asian market, reached almost $30 per million British thermal units (MMBtu) in mid-September, and was trading at $25,48 yesterday.
The price of gas delivered to Europe was $23.62 per MMBtu on Wednesday, according to Spark Commodities.
Although prices remain well below the peaks reached after Russia’s full-scale invasion of Ukraine in 2022, analysts have warned that competition for cargoes could intensify in the coming months. Developing Asian countries, which were forced out of the market by high prices during the last crisis, are now more willing to pay more to limit the damage to their economies. This could further push up prices for European buyers as the EU prepares to enter the winter months with the lowest gas reserves in at least 15 years.
The willingness of price-sensitive Asian buyers to pay more rather than risk shortages is a “fundamental shift in the gas market,” Takayuki Ueda, chief executive of Japanese gas company Inpex, told the Financial Times. “India and Pakistan seem to have become very used to price fluctuations,” he said. “They continue to be very keen to buy.”
Martijn Rats, an analyst at Morgan Stanley, said: “We have seen both Pakistan and Bangladesh buy some LNG cargoes at $25 per MMBtu. We did not see that in 2022.” At such prices, these countries “were already out of the market” during the last crisis, “and that means Europe will have to pay even more” this time, he warned. Developing Asia has little room to reduce gas demand further, having reduced consumption to near-zero levels since the start of the US-Iran war, causing power outages in some of them.
Many countries on the continent, including developed economies such as South Korea and Japan, have also increased their use of coal. But energy sector executives said the scope for further substitution of gas with other fuels was limited. “Their ability to offset the limited supply [with LNG] is real, but not infinite, and I think that will be the test going forward,” Liz Westcott, chief executive of Australian oil and gas group Woodside Energy, told the FT.
Even in Europe, there are few easy options left to reduce demand. It was already weakening before the war between the US and Iran brought maritime traffic in the Strait of Hormuz to a near-total halt, restricting global supplies.
Consumption cuts made in 2022 remain largely in place. That suggests gas prices would have to rise much higher to offset the remaining demand, Goldman Sachs analysts wrote in a note last month. Competition between Asia and Europe for LNG cargoes is therefore “inevitable,” said Anders Porsborg-Smith, a senior partner at Boston Consulting Group. LNG prices in the Asian spot market, where it is bought for immediate delivery, are currently not high enough to attract cargoes that would otherwise be headed to Europe. That could change if Asia’s largest LNG importer, China, resumes purchases after a summer hiatus, or if shipping rates fall, making it cheaper to ship U.S. LNG to Asia.
However, there may be a limit to how much some of Asia’s most price-sensitive buyers are willing to pay. Indian buyers supplying industrial gas users told Goldman Sachs that $30 per MMBtu is a threshold they cannot afford to exceed, the bank’s analysts wrote in a recent note.
If military attacks continue in the Persian Gulf, preventing the resumption of regular LNG shipments through the Strait of Hormuz, prices are expected to reach $35 per MMBtu this winter, analysts said. Several Asian countries have shifted their focus to securing long-term LNG supplies to reduce the likelihood of having to compete for cargoes on the spot market in the future.
While LNG benchmark prices have risen sharply, long-term contract prices have remained relatively stable. This is thanks to an expected wave of new capacity, mainly in the United States, coming online in the next three to four years. “We are seeing Asian countries ready to sign long-term contracts again,” said Guido Brusco, global chief operating officer for natural resources at Italian oil company Eni. “All Asian customers want 20-year contracts because prices are so low,” said one LNG producer. Worried about the expected capacity increase, many American producers are also rushing to sign long-term supply agreements.
At the Gastech conference in Bangkok this month, many American producers were trying to secure deals with buyers they would not have previously tried to attract as customers, said Iqbal Z Ahmed, chief executive of Pakistan GasPort, a company that owns import infrastructure in Karachi.
Some European buyers said they are reluctant to sign long-term deals, fearing they could conflict with strict new EU regulations that require importers to measure and report methane emissions. The bloc is under pressure to delay implementation of those rules, including from French President Emmanuel Macron. Alexandros Exarchou, chairman of the Greek group Aktor, which recently signed a long-term deal with U.S. supplier Venture Global, said he expects the EU to back off on methane regulations after a fierce race for LNG supplies over the winter and inflationary pressures caused by soaring energy prices. “If they haven’t figured it out yet, they will,” he said.
Meanwhile, policymakers in both Europe and Asia will be hoping for a mild winter. “If it’s a warm winter, we’ll be fine; if it’s a normal winter, we’ll have very large gas shortages; and if it’s a cold one, we’ll see the same prices as in 2022,” said Porsborg-Smith of Boston Consulting Group. (Financial Times)