LNG Prices: How High Will They Go?
LNG prices are at unprecedented record highs in Europe and Asia and are expected to rise further in the coming months. Both regions are now seeing prices for spot LNG cargoes near $30/mmBtu (compared to $5/mmBtu this time last year). Japan/Korea Marker and European futures show prices likely peaking above $35/mmBtu by January 2022.
These prices are a result of strong demand, low inventories, and limited supply across both Europe and Asia as the northern hemisphere heads into winter. Cold weather last winter led to robust gas withdrawals; and this was followed by rising demand as Covid-related restrictions were relaxed in summer even as power producers were switching from coal- to gas-fueled power generation.
On the supply side, Russia has limited pipeline volume to Europe while it awaits approval of the NordStream 2 pipeline; and LNG supplies are constrained by project outages. More broadly, investment in new natural gas supply has been slowed by the low price environment during Covid and by growing focus on decarbonization. Futures prices for Asia and Europe remain above $15/mmBtu through 2022; and the $10+ premium over Henry Hub is good news for the LNGC charter market. But futures drop back below $10/mmBtu in 2023, suggesting a more balanced market by the end of next year.
Where we see prices go in the near term will have a lot to do with weather in Asia and Europe, and with how much pipeline gas comes from Russia in the coming months. A cold winter could result in serious physical shortages in parts of Europe and in power cuts and hits to economic activity in China. A mild winter could return market conditions to more “normal” levels by Q1 of next year. With the La Niña climate pattern remaining in place this winter across the Pacific, we see the probability favoring a slightly milder winter in the northern hemisphere. But this is a bit of a guessing game: climate is becoming more chaotic; and last year’s La Niña did not produce “normal” La Niña winter weather. The markets are nervous, for good reason.
Look for an update of Marsoft’s LNG tanker market conditions and forecasts in the November Q4 LNG tanker market report.