In the last quarter 2020, international spot prices continued their upward momentum to exceed last year’s price levels. Asian spot prices in particular rose impressively to peak at a six-year high of 12$/MBtu at the end of the year.
This recent and unexpected spike in Asia was fuelled by Chinese LNG demand, which is rising amid a colder than average winter, and also healthy weather-driven gas demand in other parts of Northeast Asia. On the supply side, diverse LNG plants’ outages limited available LNG supplies. Tight shipping and exorbitant shipping rates also tightened supplies.
In this context, more and more LNG cargoes were redirected from the Atlantic Basin to Asia. In December, the price spread between the US and Asia reached its highest in two years. The Asian spot price premium versus TTF also peaked to more than 3.5$/MBtu.
In the summer 2020, international spot prices recovered strongly after months of depression. In September, European and Asian spot prices were more than twice the level of June.
This unexpected bullish run was mainly due to a supply cutback as global LNG supply reduced more than previously anticipated. In addition to the US, which has emerged as a swing supplier, many large LNG exporters reduced exports in response to weak demand and gas prices.
Global LNG supply had started to shrink in the second quarter (- 2% yoy) and preliminary estimates indicate that world LNG supply declined even more strongly in the third quarter, down 5% yoy, with the US and Australia leading the way.
On the demand side, Europe, China and India have seen a recovery in gas demand. This demand uptick also helped support spot gas prices. China, where gas demand has rebounded, has been the main buyer supporting spot LNG prices.
The forward prices indicate that this bullish trend will continue. However, strong uncertainties remain as spot prices have recently shown a great volatility and sensitiveness to unexpected events on the LNG market.
International spot prices have pursued a phenomenal decline in the first five months of the year due to the combined effects of milder weather, COVID-19 driven demand destruction and the ongoing LNG overhang leading to record-high storage levels.
In the second quarter of 2020, the lockdown-induced demand shock combined with LNG oversupply pushed international spot prices to new record lows.
Preliminary estimates indicate that world LNG supply weakened in the second quarter, mainly due to the downward flexibility of US LNG.
LNG is being supplied to Europe at a discount vs. oil-indexed contract prices. Given the extent of oversupply in the LNG market, major pipeline gas suppliers are losing market share.
The US has been the only market to reduce LNG production in a significant manner in response to the weakening of international LNG prices in the second quarter, emerging as a marginal or “swing” supplier for the global LNG market.
The forward curve suggests prices facing continued downward pressure throughout the summer, despite a likely decline in world LNG supply.