From the Editor: Once bitten, twice shy. Price volatility has damaged confidence [Gas in Transition]

Gas prices are falling, following a fervid and sometimes chaotic year in 2022. US Henry Hub gas futures have dropped back to just above $2/mn Btu, having reached a peak close to $10/mn Btu in August last year. The price fall reflects a worrisome slowdown in the US economy, which has become split between depressed industries and a still resilient service sector.

Inflation has caused a major round of interest hikes across the world, increasing the cost of new investment. The US has raised its key interest rate 10 times in the last 14 months, pushing the benchmark rate up from near zero to 5-5.25%. Signs are, however, that the upward cycle may have ended. US inflation has been on a steady downward trend since July last year, although at 4.9% in April, it remains some way above the Federal Reserve’s 2% target.

European gas prices, which drove the increases last year as the continent scrambled for LNG in the face of lost Russian pipeline supplies, have also calmed. European gas buyers are rebuilding inventories more slowly than last year for the simple reason that they ended Winter 2022/23 with much higher stocks than expected. Strong inventory levels at the end of the heating season usually presage weaker summer pricing (and vice versa).

Storage capacity, moreover, is not elastic. In Europe, total storage capacity is about 1,138 TWh and buyers currently feel they can meet the EU’s mandate of being 90% full by November 1 with ease. This, and the LNG import capacity added in the last year and this year, will limit concerns over gas supply in the coming winter. This means less of a panic and more moderate prices this summer, at least until the winter cold hits.

European gas prices have already fallen to half their level at the start of the year, a development which will flow through into power markets and bring welcome relief to consumers and industry across the continent.

However, whether low prices will encourage consumption after a year of high prices and intense conservation efforts is uncertain. As in the US, European interest rates have been on the rise and forecasts for economic growth are poor. EU GDP is expected to grow by only 0.8% this year and the euro-area by 0.9%. EU inflation is falling, but remains well above levels with which central banks are typically comfortable.

Gas demand is therefore unlikely to get a significant boost from non-power sectors in the short term, even if prices continue their downward trend. Looming recession, or a mid-cycle period of weak growth, look likely to limit a rebound in gas demand.

Asian demand remains muted

Another key factor behind the fall in gas prices has been weaker than expected Asian demand for LNG. The Japan-Korea Marker, which tracks LNG spot prices in the Asia-Pacific market, has been on a steady downward trend since the beginning of the year, falling below $10/mn Btu in early May.

Platts assessed the JKM for delivery of LNG in June on May 5 at $9.882/mn Btu, the lowest level in two years. The arbitrage for US LNG exports to Asia remains open, but it has narrowed significantly as the JKM has fallen further and faster than US domestic gas prices.

Like Europe, Asia has started the summer with higher gas stocks than normal, which has kept a lid on spot market demand. In particular, Chinese LNG requirements have remained low, denting expectations based on a stronger economic revival following the removal of the country’s zero tolerance policies on Covid.

In both Europe and Asia, prices could weaken further as storage levels return to tank top levels ahead of next winter. It may take lower prices still to stimulate a robust demand-side response, particularly in the context of weak economic growth and potential recession.

Confidence needs to be rebuilt

There is, however, another factor at play. The period of high and volatile prices has taken a toll on confidence. 

Such periods, as in the oil market, where there are less alternatives, typically result in some permanent demand destruction. They instil caution – buyers continue with strategies that reduce their exposure to international price volatility until a commodity market -- in this case LNG – looks more stable and predictable.

At present, while available LNG volumes are increasing, stability and predictability are still absent. 

A hot summer pushing up Asian cooling demand and a cold winter impacting northern hemisphere heating requirements in the still extant environment of truncated Russian gas supplies to Europe, driven by an unpredictable conflict, mean price volatility could re-emerge at short notice.

It is therefore hard to blame buyers who are reluctant to put their feet back in the water.

New supplies are coming…

There are some certainties. First, in the absence of Russian gas pipeline supplies, European consumption of LNG should continue to underpin the market, seasonal swings in demand notwithstanding. Second, US investment in new liquefaction plants, in addition to the ongoing large-scale expansion of Qatari LNG, will increase supply substantially this decade.

According to US Energy Information Administration data, the timelines are for Golden Pass to add 18mn mt/yr of new capacity in 2024/25, Plaquemines Phase 1 13.33mn mt/yr in 2024 and a further 6.66mn mt/yr from Phase 2 in 2025, while Corpus Christi Stage III will see 11.45mn mt/yr come into operation also in 2025. These should be followed by Port Arthur LNG Phase 1 – 13.5mn mt/yr – in 2027/28, at which point new Qatari volumes should also be coming to market.

But this makes this year and next -- before this new capacity comes onstream -- a difficult period for the LNG industry. There is a high risk of further damaging price volatility amid the uncertain implications of an imminent Ukrainian counter offensive.

In this period, buyers and power system planners will remain cautious and pursue other options, for example continued reliance on coal-fired generation and, without question, the accelerated expansion of renewable energy. The first option simply delays a problem which LNG is well suited to address. The second represents more permanent demand destruction for the industry.

A period of stabilisation that rebuilds confidence in LNG not just as a lower carbon alternative to the mass use of coal, but a predictably affordable and available alternative, is sorely needed.

Qatar’s large-scale capacity expansion and those US developers which have managed to cross the line to financial close are key to creating this environment. But it may also be a period of weak global economic growth which keeps demand down, bridging the gap before new LNG supply comes onstream.