The price of LNG reached unprecedented lows in the spring of 2020; but, as OilPrice's Venand Meliksetian points out, a year later, the revitalization of the market is a fact. Prices of the supercooled fuel in especially Asia have reached astronomic heights due to a combination of factors. The most important LNG buyers-markets are in Asia and Europe. The latter, however, also enjoys a well-developed crossborder pipeline infrastructure that connects producers in Russia, North-Africa, and the Caspian to consumers. Asia, on the other hand, is much more dependent on LNG. Therefore, the top three largest importers are all Asian: Japan, China, and South-Korea.
The rise in LNG prices has several explanations.
First, economic activities have remained relatively strong in Asia throughout the year. China was the first country to experience a lockdown in February 2020 due to the spread of the Coronavirus. Other East Asian countries also implemented rapid and aggressive measures to mitigate the health crisis. The economy experienced a rebound while most countries were still grappling with the pandemic. Demand for commodities such as LNG, therefore, has remained strong.
More important, however, is the cold winter weather. BAMWX meteorologist Kirk Hinz first alerted us about a massive spike in temperatures happening miles above the North Pole, resulting in a sudden stratospheric warming event (SSWE) splitting the polar vortex into two. This means Arctic temperatures are pouring into parts of Asia and Europe, at the moment, sending natural gas prices in those regions sky-high.
Bloomberg's Javier Blas tweeted Monday that "LNG Asian benchmark JKM has jumped to a fresh all-time high of $28.2 per million British thermal units, up 32% from Friday" due to increased power demand because of the cold weather in the region.
Last week, China's power demand surged as Arctic air blanketed parts of the country, sending power demand to record highs.
While prices have soared in Asia, Europe is also feeling the pinch despite its cross-border pipeline infrastructure. Cold winter weather in general and Covid-19 have increased consumption as people remain inside. The high prices in Asia have echoed through Europe where the gas benchmark hit a two-year high.
On Monday, British wholesale gas prices surged to their highest levels since December 2018, or about a two-year high, due to colder weather.
Forecast temperature deviations for Europe show much of the continent will continue experiencing colder than average temperatures for the month.
However, as Meliksetian notes, it is uncertain whether prices will remain high in the long term. Although the beginning of the end of the pandemic is in reach due to the arrival of vaccines, long-term economic predictions remain bleak. It could take years before the economy and demand for LNG are what they were before the pandemic.
Russia's export to Europe, for example, hovered around 200 bcm for the last couple of years. For 2021, however, the expectation is that ‘just’ 170 bcm will be exported with an increase to 183 bcm in 2022. This shows the dire state of the market in at least Europe in the short to medium term.
The room for growth in Asian markets makes these countries even more important for LNG exporters. China already is on the brink of unseating Japan as the world's largest importer. The expanding market is not limited to East Asia. Countries in the south, such as India and Pakistan, are also gaining importance. The LNG market, however, remains highly volatile especially as the economic consequences of the pandemic are not yet fully understood.
And that surging cost could be coming home soon, as BAMWX's Hinz has pointed out, high impact cold and storminess across the eastern US and Canada is next?