Asia’s summer, Europe’s winter create explosion in LNG market
From ample supplies to scarcity
Post-2020 recovery coupled with empty gas tanks at the end of winter and increasing LNG demand for power generation have led to a 180-degree shift in the LNG market, from being over-supplied in 2020 to the tightness at present.
In Asia, China’s LNG imports were at record highs which also took the country ahead of Japan making it the world’s leading LNG importer. After facing gas shortages in winter, China started stockpiling much earlier in 2021 with recovering demand from the industrial sector and coal-to-gas switching in the power sector driving growth. Erstwhile, Japan’s and South Korea’s LNG imports also rose along with their reliance on gas power generation amid lower nuclear output.
Meanwhile, India and Thailand struggled with rising Covid cases impacting their LNG imports. The development in these countries is a stark reminder that the pandemic is not over yet and there can be more volatility in LNG demand and supply over 2021-22.
In Europe, prolonged low temperatures kept heating demand high even in May while storage injections were also hampered due to lower supply from Russia and maintenance in Norway. Additionally, European LNG imports have been low in 2021 so far as higher Asian spot LNG prices pulled LNG cargoes away from the region.
US LNG exports increased to a record high barring the cold snap in February. Qatar’s exports have also risen after the completion of its pre-summer maintenance of two Ras Laffan trains. Additionally, exports from Nigeria, Peru, Indonesia and Malaysia have also increased after their unplanned outages.
On to summer
Demand in China, Japan and South Korea will remain robust owing to the hotter summer outlook increasing LNG demand for cooling and inventory replenishment. Nuclear restarts scheduled in Japan and South Korea will have minimal impact on summer LNG demand due to the rise in CGD consumption and storages. Other Asian importers – India, Pakistan, Bangladesh and Thailand – are also on the lookout for spot supplies to satisfy domestic demand.
For Europe, securing LNG cargoes will remain difficult this summer as more cargoes get pulled to Asia.
LNG supplies will be squeezed as many units are scheduled to go for planned maintenance over the summer, mainly in Australia and the US. Russian LNG cargoes transiting the North Sea route to Asia will ease the tightness to some extent. However, supplies will still be scarce for Europe.
Europe tightens LNG market
European storages were at 44% in June, 25% below average. Subdued Russian pipeline supplies and difficulty in securing additional LNG cargoes will impact the restocking activity in the region, leading to lower storages at the end of summer. The surging TTF prices also give little incentive to store the gas as future prices are only $2-3 per MMBtu higher than the present.
The region could get some respite if negotiations with Russia are successful and higher volumes flow in through Ukraine. Clearance for Nord Stream II pipeline may also see an additional 7.5 bcm (5.5 million tonnes) of gas coming to Europe in 2021 from September with a ramp-up until November. Regional gas power generation demand is also expected to ease with a rise in renewables and few countries switching back to coal.
Taking the current injection rate and assuming the infusion of Russian pipeline supplies, we project the storages to be 65-70% by October, far below the levels needed to support the region’s winter demand. Therefore, we expect a fiery period in October when they would scramble for LNG cargoes leading to even higher spot prices.
Asian LNG imports are likely to ease by September with nuclear restarts reducing power generation demand and inventories reaching sufficient levels. Additionally, few Asian countries are expected to delay their spot cargo procurement due to the high spot prices and might switch to coal again as an alternative.
The easing demand is expected to bring some stability to the Asian spot prices and in turn to the TTF prices which may allow record cargoes to be programmed for Europe in the winter.
Shipping a breeze, choppy patch ahead
LNG shipping recently witnessed a slew of short-term charters whereby several vessels were taken on for multi-month periods. In the winter of 2020, vessel spot rates surged to a high of $350,000pd while lack of available tonnage forced the cancellation of some US cargoes. Hence, charterers are keen on securing vessel capacity for the peak season, highlighting their bullish stance on the winter of 2021.
LNG shipping rates are on an unseasonal uptrend where spot rates for a standard TFDE carrier are around $70,000pd for June 2021, more than double the levels seen in 2020 and 30% up from 2019. The rates are expected to increase over the summer months as higher trade expected on the US-Asia route and possible delays at discharge terminals will keep the vessels busy. However, we expect some of the chartered vessels to enter the spot market as sub-lets, keeping vessel rates in check before the end-of-year surge. Higher LNG spot prices may also discourage some Asian and South American countries from procuring cargoes, limiting vessel demand.
We also expect the Panama Canal congestion to recur in end 2021 although its impact would be reduced as charterers are already identifying alternative routes or sourcing regional LNG stocks for the peak months. In such a scenario, we would see the tonne-mile demand recede with more US cargoes to Europe while Australia and Qatar cater to Asia.
Overall, 2021 is set to pan out as a remarkable year for LNG shipping buoyed by recovering LNG demand after the shortfalls of 2020. LNG shipping rates, which started the year on a high are expected to end the year at similar levels as well with the bull-run expected to last until 2Q22 when we expect demand to normalise.