The flood of LNG poised to hit the global natural gas market later this decade is widely expected to push prices lower, potentially broadening the super-chilled fuel’s appeal in a way that could stoke more demand and help absorb the projected supply glut.
Global natural gas prices have steadily fallen since Russia invaded Ukraine and sent buyers scrambling to secure supplies after the Kremlin cut off exports to Europe. European natural gas traded at nearly $100/MMBtu at the height of the crisis in August 2022, while Asian liquefied natural gas hit nearly $70 at that time.
Since then, the Title Transfer Facility (TTF) has plummeted nearly 90% and was trading around $11 at the start of July. The Japan-Korea Marker (JKM) has fallen by about 80% and was near $13 at the start of July. Although record high temperatures and geopolitical risks are keeping prices elevated, the market has rebalanced since the supply shock of 2022 and buyers are sitting on more comfortable inventories.
“We started to see how responsive LNG demand has been across emerging markets as prices have come down,” said Wood Mackenzie’s Massimo Di Odoardo, vice president of gas and LNG research, referring to the rebound in spot buying activity this year.
Despite the near-term risks that are poised to keep prices volatile, including heat waves, supply disruptions, and conflicts in Ukraine and Israel, the global gas market is nearing what’s likely to be an entirely different phase.
Nearly 40 million metric tons (mmt) of LNG capacity is expected to come online annually between 2026 and 2028.
That would push the world’s liquefaction capabilities well north of 500 mmt/year (mmty) and far surpass each of the previous two supply cycles dating back to 2009. The market currently consumes about 400 mmty.
The next wave of supply is likely to be “constructive” for a market that has endured record high prices and extreme volatility in recent years, said Cheniere Energy Inc. Chief Commercial Officer Anatol Feygin.
“We believe new supply will help moderate spot prices and volatility to a relatively more affordable and less volatile level on a sustained basis, helping LNG reinforce its credentials as an affordable, secure, and sustainable component of baseload energy supply, particularly for the high-growth nations of Asia, which are currently heavily dependent on coal to support their economic growth and energy security,” he said during the company’s first quarter earnings call in May.
Samantha Dart, head of natural gas research at Goldman Sachs, told NGI that prices have to fall further to create the sort of demand needed to match the next supply cycle.
“Ultimately, we do expect Asia LNG demand growth in particular to absorb those volumes, so that this bearish cycle for global gas we see in the second half of this decade doesn’t last forever,” she said.
Roughly 60% of the new liquefaction capacity under construction and coming online over the next three years or so is located in the United States and Qatar. The projects are no doubt factoring into strip prices, which at the start of July showed TTF lower near $9 and JKM lower near $10 for calendar year 2027, when much of the supply is due to come online.
That would bring the benchmarks closer in-line with their historical ranges over the last decade, according to NGI data. JKM traded between a range of $4 and $11 during that time, while TTF was generally below $10.
If prices fall significantly, there could be a stronger demand response than currently forecast, said Poten and Partners’ Jason Feer, global head of business intelligence.
“Lower prices would trigger higher imports for some of the price-sensitive consumers like India, Pakistan and Bangladesh,” he told NGI.
All Eyes On Asia
The energy crisis hastened the transition away from fossil fuels in Europe. The continent has accelerated policies to gain energy independence and rely more heavily on renewables. While Europe has dramatically stepped up its intake of LNG over the last two years, overall, natural gas demand has declined by about 20% on the continent.
If natural gas prices come down significantly, however, there remains uncertainty over whether Europe would then increase its LNG imports, especially considering its plans to bring more regasification capacity online.
There’s a chance some demand comes back, but to what extent is unclear, said Rapidan Energy Group’s Alex Munton, director of the firm’s global gas service.
“In the big scheme of things for the LNG market, it’s not going to move the needle, but lower prices will act as a catalyst for some demand growth or at least to prevent further declines,” Munton said of Europe. “It’s going to be part of the market dynamics, but not a major part.”
That leaves Asia to shoulder much of the demand growth.
“We definitely think that lower prices will eventually boost demand in Asian markets, not necessarily in mature markets like Japan, but certainly in newer markets in China or smaller, emerging markets,” Di Odoardo told NGI.
Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis, agreed that price-sensitive buyers in Asia are likely to step up for additional cargoes as prices fall. But he stressed that structural demand growth in the region, or the infrastructure needed to import and consume more gas, is not growing nearly fast enough to absorb the next wave of supply, particularly in South and Southeast Asia.
Falling prices, he added, could be a double-edged sword. The United States is currently the world’s largest exporter. But with growth in U.S. electricity demand projected from data centers and increasing liquefaction capacity, American gas could become less competitive if it rises and global prices decline. If the arbitrage spread narrows, margins could be squeezed.
“You could end up with, in my mind, a serious squeeze on contracted offtakers, particularly the ones like portfolio players that are buying at fixed prices and selling at spot prices,” Williams-Derry told NGI.
NGI’s Forward Look data shows Henry Hub spot prices averaging well below $5 through the end of the decade.
More flexible long-term, take-or-pay U.S. LNG offtake contracting has also strengthened in recent years as buyers have sought cover from high prices and a volatile spot market. If U.S. cargoes were to become uneconomical, then liquefaction plants on the Gulf Coast could shut in or run at lower utilization rates to help balance the market as they did during a glut in 2020.
Unlike previous supply cycles when long-term deals have fallen out of favor amid lower spot prices, contracting is expected to remain relatively strong in the years ahead. That would set the stage for a market in which both spot deals and long-term contracts are attractive.
The supply shocks of recent years have reinforced the need to secure supply. Oil prices are also expected to fall later this decade as well, keeping crude-indexed contracts relatively affordable.
“Many buyers are trying to determine where the market is going before committing to additional long-term contracts,” Di Odoardo said. “A buyer's market is likely to fuel more opportunistic buying, but the idea of security of supply following the last few years is certainly different to what it was pre-crisis.”
