Editor’s Note: This column is part of a series by industry veteran Brad Hitch for NGI’s LNG Insight dedicated to addressing the complexities of the global natural gas market.
The last few months have seen the European natural gas market enter a new phase of its post-Ukraine invasion existence.
The second warm winter in a row has not only enabled Europe to comfortably navigate the heating season without Russian supply, it has moved prices away from the scarcity paradigm of the last few years into a range that is no longer unprecedented.
It is premature to think that a very cold winter in the next two years couldn’t put scarcity back on the agenda, but if it happens, it will be after the remainder of this year’s storage withdrawal and injection cycle. In other words, for the time being, we’re locked into a market wherein Europe is unlikely to either outbid the rest of the world, as it did in 2022, or act as a market of last resort, as it did prior to the invasion.
In the previous column, we covered the relationship between LNG imports and European injections given the current supply stack (i.e., liquefied natural gas is necessary to balance ongoing demand and effectively provide all the supply to inject into storage).
This implies that Europe’s ability to reach its mandated storage targets could be impacted by availability of LNG over the coming six months. More specifically, the ability of Europe to meet its targets without reverting to scarcity-driven behavior may largely depend upon the looseness of the market during the main injection months through July.
Unfortunately, the LNG market still has not established a global marker or futures contract for LNG that can help the market efficiently allocate supply between near term demand in Asia and overall injection season demand in Europe. Consequently, for U.S. market participants seeking to anticipate late summer pricing dynamics, it is important to keep an eye on fundamental variables that could develop.
Demand Trends
The first variable to consider would be whether the large Asian importers continue their current demand trajectory. Much of the story of the LNG market in 2023 was the uneven demand recovery in Japan and China, the world’s two largest importers.
Chinese LNG imports in 2023 recovered about half of the 2 Bcf/d that they had lost in 2022, but this was largely offset by the 0.75 Bcf/d year/year decline in Japanese imports.
Thus far in 2024, the two markets look to be continuing their divergence, and China appears set to fully claim the top importer crown for the foreseeable future. China imported 12.75 Bcf/d of LNG in January – the second highest level for January imports, coming in just behind January 2021, according to Kpler data.
Conversely, Japanese imports for January came in below 10 Bcf/d for the first time since 2011.
The January 2011 comparison is notable as it was two months before the Fukushima disaster that year that ultimately led to the shutdown of Japan’s nuclear generation fleet and the record LNG import levels that followed.
Not coincidentally, the overall level of Japanese imports for 2023 came in just above 9 Bcf/d, the lowest annual number since 2010, the last full pre-Fukushima year.
Thus, the earliest data points for the “big two” largely suggest a continuation of much of their 2023 performance.
Last month, Chinese imports were 2.8 Bcf/d, up significantly from the same time in 2023. But last year, it wasn’t until after February when Chinese imports recovered half of their losses from 2022.
It may be a tall order for Chinese imports to recover all the way to 2021, even with increased gas consumption. There was a small drop in 2022 Chinese gas consumption, but the real driver for falling LNG volumes that year was an increase in pipeline imports coupled with significant gains in domestic production.
The above tends to suggest that Japanese imports would remain flat to last year coupled with a small increase in Chinese imports.
However, there have been significant investments in Chinese infrastructure in the form of regasification terminals, pipelines and natural gas-fired power generation. It is entirely possible that underlying gas demand will have grown sufficiently by the middle of the year to allow LNG import recovery to 2021 levels, which would tighten this summer’s market by about 1 Bcf/d over last year.
Even if China does not break its import record, it would appear Asian LNG importers in South and Southeast Asia are poised to build on the upward demand trajectory that started last year.
India recorded one of its highest ever monthly import levels in January, while Singapore and Thailand each set January import records that eclipsed 2023 by 50%, Kpler data show.
Elsewhere across Southeast Asia, market newcomers in Hong Kong, the Philippines and Vietnam seem to be picking up pace, demonstrating that the Asian market has the potential to tighten up even if China doesn’t match its 2021 levels.
However, if Asian demand growth in 2024 is driven by the smaller importers, it would probably be less commented upon than if it were to come from China.
China and Japan are far and away the most visible among the importers because of their size and overall standing. Slight growth in China coupled with stagnation in Japan would likely cast a bearish pall over market commentary, potentially allowing robust growth from elsewhere to accumulate unnoticed for a while.
Supply Performance
The U.S. LNG export expansion rightfully draws most of the attention for enabling the replacement of Russian natural gas imports, but Europe has been helped on the margin by upstream performance elsewhere that may not be sustainable.
Exporters such as Algeria and Indonesia were able to partially reverse declines in 2022 and 2023, but whether this can be maintained in the face of growing domestic consumption remains to be seen. Algeria is particularly important in this regard as it has been a source of increased pipeline exports into Europe that, as of this year, have slightly regressed.
Australian exports would also be very important to keep an eye on throughout the European injection season. Australia broke its record for LNG exports for the third year in a row in 2023, but may find it difficult to maintain the current production level given the decommissioning of some capacity coupled with headwinds created by tighter environmental regulations.
Moreover, if the La Niña weather pattern in the second half of 2024 comes true, this would potentially be the biggest wild card of all. It could provide for a volatile third quarter if Europe finds its U.S. supply threatened by heightened tropical storm activity and Asian buyers pile up LNG purchases to safeguard against the risk of the extreme winters associated with the first year of a La Niña.
The European market has been fortunate – downright lucky – with the way that weather has actualized since the Russian invasion. This could prove to be the year that the luck finally runs out.
Brad Hitch has spent more than 23 years working in LNG and natural gas trading from London and Houston. He currently works as an adviser to new market entrants, and he has held senior trading and origination positions at Barclays, Cheniere Energy Inc., Enron Corp., Merrill Lynch and Williams.
