WoodMac: Europe as global LNG price-setter

Energy intelligence group Wood Mackenzie reports Europe’s LNG market dynamics as the ones driving the LNG price recovery.

Global LNG markets were set to tighten over the next five years, driven by a slowdown in global LNG supply growth. However, following the recent winter spot price rising in Asia, the European market has been sustaining global LNG prices, making the region the place for global LNG price formation, Wood Mackenzie reports.

The title transfer facility (TTF) is currently trading close to $9 per million British thermal units (mmbtu), which is the hightest level seen since mid-2018.

Head of LNG short-term, gas and LNG research Robert Sims explains: “Post-pandemic demand recovery, limitations on Russian pipeline exports and unseasonably cold weather, particularly in April, all contributed to a tighter market, pushing European storage levels down to multi-year lows. But the key dynamic for the price surge has been the strengthening economics of coal-to-gas switching. Since November last year, carbon prices and coal prices have increased by 33 per cent and 26 per cent, respectively, which alone have pushed European TTF gas prices up by US$3/mmbtu.”

South Asia’s and south-east Asia’s LNG demand has either recovered or started to grow again.

“But China is where much of the growth is currently materialising, with coal-to-gas switching policies gathering pace, resulting in a demand surge of 2.2 million tonnes since the beginning of the year, 8 per cent more than in 2020…Strong Asian LNG demand means that the Japan spot price is now trading over US$10/mmbtu for deliveries in June, a premium in excess of US$1.5/mmbtu over TTF,” added Sims.

Wood Mackenzie predicts market dynamics will remain tight throughout 2021, with global LNG supply stronger this summer compared to the summer last year, some additional 16 million tonnes per annum (mmtpa) supported by full utilisation of US LNG.

Demand for restocking and coal-to-gas switching economics in Europe will supports their prices through the summer. The single biggest risk to prices will be European carbon prices.

Market dynamics are expected to soften in 2022. LNG demand growth in Asia is to slow down, coal and nuclear capacity is to increase in Japan and South Korea, and more offshore domestic supply is to be available in India. LNG demand in Asia will increase only by 12 mmtpa in 2022, compared to 19 mmtpa in 2021, according to WoodMac.

Global LNG supply will grow by 18 mmtpa, supported by the commissioning of Sabine Pass T6, Calcasieu Pass and Tangguh LNG T3. This will result in more LNG available for Europe – six to seven mmtpa, or nine per cent more than in 2021.

The key element that will shape market dynamics in Europe throughout 2022 will be the ramp-up of the 55 billion cubic metres per annum Nord Stream 2 pipeline from Russia to Germany.

Next summer TTF prices could be below US$6.5/mmbtu, some 30 per cent lower than this summer.

The consultancy firm goes on to say that prices might soften in 2022, but market fundamentals point towards a further tightening of the global LNG market through to 2025. With LNG demand in Asia continuing to increase and global LNG supply growth set to slow down, competition for Atlantic LNG will intensify, reducing LNG availability to Europe.

And with carbon prices remaining high and domestic production continues to decline, Europe will increase its reliance on Russian pipeline gas.

The global LNG oversupply that has affected the market since the end of 2018 has now come to an end, at least until the next wave of post-FID LNG supply comes to market post-2025, Wood Mackenzie concludes.