Global Natural Gas Prices Continue to Soar

An Analysis by the Al Attiyah Foundation

An Analysis by the Al Attiyah Foundation

Liquefied natural gas (LNG) prices are up around the world, driven by demand in China and across Asia, which is helping push benchmark prices in Europe to decade-plus highs as well. US prices have also risen, partly due to hot weather and an LNG export boom – suggesting a fully integrated international market is finally developing, with all prices moving in line, although the US remains far cheaper (excluding delivery costs). Longer-term, fundamentals are increasingly pointing to a sustained period of higher prices, although long-term deals are still struggling to follow the upward trend in spot prices. 

As summer 2021 progresses, global LNG demand is looking robust, buoyed by the global relaxation of COVID-19 restrictions and warm summer temperatures - as well as higher coal and oil prices, and strong economic growth. European buyers are also attempting to replenish stocks that are well below normal levels, while coal to gas switching in Europe has been supported by high carbon prices, and in Asia by policy changes. At the same time, LNG supply to Europe in the first half of 2021 was down (by 18% year on year, says HSBC), tightening supply, while wind generation was low, boosting gas demand – which is likely to be an ever-more significant factor in future European gas demand fluctuations, alongside temperature (April was cold and June was the second hottest on record, both scenarios raised power/gas demands). The demand strength has been accompanied by several upstream outages and delays, along with extensive summer maintenance (including pandemic deferred maintenance from 2020) and falls in domestic production. 

Shell recently estimated that global LNG demand would increase by at least 10 million tonnes to 370 million tonnes this year, a 2.8% rise on its 2020 figure, with most of that coming from Asia. The biggest contributor to this demand is China, which saw LNG imports jump 29% from a year ago to 39.8 million tonnes in the first six months of 2021, according to Refinitiv data, after a big rise last year when they hit 67.4 million tonnes in the complete year - up about 11% compared with 2019, despite the pandemic. Gas switching, high temperatures, and strong economic growth are all driving demand. 

And there is room for more – China’s import capacity is to rise by almost 50% on late 2020 levels to 107.9 million tonnes per year (mn t/yr) by the end of this year, although LNG imports will have to compete with a planned rise in Russian pipeline supply and higher domestic output.

Indian LNG demand was also up sharply in 2020 and will be further boosted this year by economic recovery, delays in domestic upstream gas projects and, declining output from mature fields. In South America, low hydroelectric reserves in Brazil and declining gas production from Argentina and Bolivia have also increased LNG demand there during the southern winter. 

Together these factors have pushed LNG prices up to multi-year records for the time of year, which has also helped drive up the European benchmarks, National Balancing Point (NBP), and Title Transfer Facility (TTF). LNG prices delivered in Northeast Asia at the beginning of July reportedly rose as high as $14.50/ Million British Thermal Unit (mmBtu) for August/September delivery - the highest since 2013, and up sharply from a post-winter low of $5.60/mmBtu. The strength is a continuation of considerable spot price volatility since early 2020, with the main Northeast Asian benchmark fluctuating between $1.82/mmBtu during the first COVID-19 wave last April and a record high of $32.50/mmBtu this January. As the LNG prices peaked, the front-month price at the Dutch TTF hub hit a record high of $13.22/mmBtu on July 5th, while the British NBP gas contract hit a 13-year high of $13.8/mmBtu on the same day. 

In the US, a historic heatwave in the Pacific Northwest, along with the hottest June on record, and high export demand, pushed Henry Hub prices to multi-year highs, while spot gas prices in southern California surged to over $7/mmBtu in June out as far as August. 

The influence of global LNG prices on European gas prices is likely to grow further as domestic European output declines over the coming years, and LNG import capacity rises, although Russian supply will remain a key variable. Russian pipeline exports have recently fallen well below normal levels, helping support European benchmarks. This is because Gazprom, the largest supplier of natural gas to Europe and Turkey, has not booked any extra export capacity with Ukraine for several months, and does not appear interested in booking any capacity with Poland for gas years 2021-25 either. This adds to pressure for rapid commissioning of Nord Stream 2 (underwater twin pipeline that would transport natural gas from Russia directly to Germany), the sort of pressure the US and Germany said they would not bow to. But if more Russian gas is not forthcoming through Nord Stream 2 or elsewhere, European prices may have to rise further to compete with Asian buyers for more LNG.

Can this rally be stopped? Strong fundamentals point to continued high demand and prices 

The question is now whether spot prices will stay high, given the LNG market will technically be in surplus next year (provided all plants are back up). Despite last winter’s spike, and now the summer’s high prices, the International Energy Agency said in a recent gas market outlook that there was still little threat of structural tightness out to 2024. But other analysts are more bullish. HSBC expects some tightness from 2023, when only 12mn t/yr of new capacity is expected, compared to an increase in demand of 24mn t/yr. Morgan Stanley also sees a possible capacity shortfall from 2023, and the need for another 60mn t/yr of new projects to meet demand up to 2030. 

Others are more bullish still. Wood Mackenzie expects the current strength to continue right through to 2025 as Asian LNG demand keeps rising. Indeed, increasing demand could outpace LNG supply additions in 2021-22, with less than 30mn t/yr of new liquefaction capacity expected onstream. Policy and weather are key uncertainties. Further ahead there could also be more of a squeeze than expected after only 3mn t/yr of new LNG capacity was approved in 2020, compared to projections of up to 60mn t/yr – although Qatar’s decision to go ahead with its four train North Field expansion earlier this year (up to 49mn t/yr) has somewhat offset this concern.

But while spot markets are strong, so far this year term markets have remained weak, and will likely stay that way until it becomes clear that demand will outstrip new supply available from Qatar and Russia, according to Wood Mackenzie. Much of the weakness is down to plentiful uncontracted supply after 2025. 

Others suggest the recent volatility is making buyers concerned over future supply, which could encourage term purchases and liquefaction plant final investment decisions (FIDs) over the coming months. Given greater tightness prior to 2025, term deals could provide buyers with lower prices over the next five years, in exchange for a commitment to buy out to 2030 or beyond. Without term deals, new liquefaction plants are taking on all the climate change risk, which is rising especially for European and Northeast Asian buyers. New buyers in China and South Asia appear more prepared to commit to the term. 

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