Europe’s plans to cut piped Russian gas imports by two-thirds by the end of the year and replace them with LNG from the United States and Africa are intensifying competition for power plants and hot fuels. China’s war with the Covid-19 will end after 2022, which is expected to boost industrial demand in Asia’s largest economy.
In a typical year, LNG importers stockpile supplies for the maximum winter season in the summer. It appears to have started earlier this year, with South Korean and Japanese utilities already snatching shipments for delivery in early 2023. The supply crisis increases the risk of electricity bills and inflation, and the poorest nations may miss out.
“Everyone is looking forward to this coming winter,” said James Whistler, Global Head of Energy Derivatives at Simpson Spence Young. “Everything points to a tight supply in normal conditions, but there are also additional risks.”
How to bridge the growing gap between supply and demand will be the topic of discussion at the World Gas Conference in South Korea this week. It is the first major industrial gathering in Asia since Russia’s invasion of Ukraine, which has suspended LNG trade and pushed up prices.
Global demand will reach 436 million tons in 2022, exceeding the available supply of 410 million tons, Rystad Energy said in a note this month. While rising costs have encouraged the largest crowd of new projects worldwide for more than a decade, most new supplies will come online after 2024, it said.
Traders are moving LNG shipments away from Asia and choosing to sell in Europe where prices are more attractive. Germany is fast-tracking the construction of a floating import terminal, the first of which will begin later this year. In the meantime, however, it will become a tough spot market, perhaps at the expense of developing countries like India and Pakistan.
“There is no surplus power across the Global Gas Complex, putting Europe and Asia in a tug-of-war for available supplies,” said Michael Stoppard, Global Gas Strategy Lead and Special Adviser to S&P Global Commodity Insights.
European gas prices fell from a peak in early March immediately after the Ukraine invasion, but are still above average for this time of year. The fall could give buyers in the region more opportunities to replenish stocks in the coming months, but much will depend on how quickly Chinese demand returns.
The world’s top LNG importer is shopping for fuel spot shipments after months of absence in anticipation of a quick bounce back once the virus restrictions are relaxed. Nevertheless, many Chinese importers are reluctant to lock deals, as usage remains high, which could lead to a sharp rise in buying towards the end of the year.
“Strong LNG demand in Europe is assured, but Wildcard is China where current demand is weak due to ongoing Covid-19 lockdown and slowing economic growth,” said Valerie Chow, Asia-Pacific head of gas and LNG research at Wood Mackenzie Limited. “As European and North Asian buyers compete for volume, the market will tighten in the winter.”
© 2022 Bloomberg