Spot LNG prices have plummeted in recent weeks, allowing price-sensitive buyers in South Asia to re-enter the market from which they were priced out last year amid sky-high rates.
Demand in Asia is tepid so far this year, but the wild card in energy markets-China-has yet to show the trajectory of a rebound in gas demand.
Buying activity has been muted in recent weeks around the Lunar New Year holiday in China, and prices for delivery to north Asia slumped to the lowest levels since September 2021.
Europe continues to welcome LNG cargoes, although it is comfortably stocked on gas, thanks to a mild start to the winter heating season, demand destruction in industry, and energy savings as energy bills soared.
But China could spoil the party for European gas stocking-and just in time for next winter.
This winter, Europe is in a better position than many had predicted just a few months ago. It is also in a much better position in terms of gas inventories compared to the five-year average, thanks to the mild weather for most of December and January. But ahead of the next winter, should Chinese demand rebound, Europe could face stiffer competition when stocking up on supply.
Asian LNG Prices Dip To More-Than-A-Year Low
Right now, the LNG market in Asia looks looser than a few months ago, and prices slumped for a sixth consecutive week in the week to January 27, to just $19.50 per million British thermal units (MMBtu), a plunge of 11.4% from the previous week, per industry sources quoted by Reuters. In the four weeks between January 1 and January 27, Asia's spot LNG prices dropped by 34%.
This decline-due to lower gas prices in Europe and to the Lunar New Year holiday - has incentivized price-sensitive LNG customers in south Asia, such as Bangladesh, Thailand, and India, to return to the spot market they abandoned a year ago amid surging prices.
"We are back in the comfort zone of many price-sensitive South and Southeast Asian buyers. Accordingly, we have seen Thailand and Bangladesh most recently," Kaushal Ramesh, senior LNG analyst at Rystad Energy, told Reuters.
Ideally, buyers in south Asia would prefer even lower spot LNG prices, analysts say. But the market has yet to see economic growth and LNG buying trends in China.
The Chinese reopening and an expected rise in energy demand, including for LNG, will lift prices in Asia again and could intensify the Europe-Asia competition for attracting spot LNG cargoes with flexible destinations.
High spot LNG prices last year priced out many Asian buyers as Europe bid up for supply and became the primary destination of spot LNG cargoes. At the same time, market volatility and uncertainties, and concerns about energy security, have prompted a growing number of buyers to seek long-term contracts, even buyers in Europe that were previously reluctant to lock in supply for the long term in view of the clash between the carbon footprint of LNG and the EU's climate ambitions.
Chinese Rebound?
Natural gas consumption in China fell last year by 0.7 percent, the first annual fall in demand in four decades, according to the International Energy Agency (IEA). China's LNG imports also fell, much more than gas demand, and China handed back to Japan the top spot on the world's top LNG importers list.
In 2022, China saw a rare drop in gas consumption amid a slowdown in economic growth and the zero-Covid policy.
China's lower LNG imports last year "have been a key enabler of higher LNG availability for Europe to compensate for the drop in gas deliveries from Russia," IEA said in an analysis in November.
"If China's LNG imports recover next year to their 2021 levels, this would capture over 85% of the expected increase in global LNG supply," the agency said.
Europe could face a gap of as much as 30 billion cubic meters (bcm) of natural gas during the key summer period for refilling its gas storage sites in 2023, the IEA noted.
A return of strong buying from China this year would lift LNG prices and intensify the competition for spot flexible supply, making it more difficult for Europe to fill inventories ahead of the next winter. Still, the comfortable level of gas in storage across Europe has eased concerns of an immediate major crunch and made the prospect of gas rationing less likely.
"LNG has been, and will continue to be, a key alternative source of gas to replace reduced Russian pipeline flows," Fitch Ratings said in a report on Wednesday.
"Global LNG markets will remain tight this year, amplified by increased demand from China after lifting its zero-Covid policy. However, Fitch believes that sufficient LNG volumes will still be available for Europe, albeit at prices that reflect intensifying competition with Asian buyers."
China continues to invest massively in gas infrastructure, with LNG import capacity expected to jump by 20% to 135 mmtpa by the end of 2023, Gavin Thompson, Vice Chairman, Energy - Asia Pacific at Wood Mackenzie, said last month.
This would potentially allow "a resurgent Chinese economy to pull LNG supply away from Europe next winter. With this level of investment, China is now the global LNG wildcard."
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More