BloombergNEF sees the Dutch Title Transfer Facility (TTF) futures market currently pricing in significant risk of a disruption to Russian gas pipeline supply over summer and winter 2022-23. This has raised European gas prices to record highs, overtaking Asian spot LNG prices and resulting in a gush of LNG flows to Europe.
High spot LNG prices will continue to cause demand destruction across Asia. Industry users in China and emerging Asian markets are not able to afford gas supply at current spot LNG prices, so they are resorting to either reducing their operations or switching to alternate fuels. In Japan, gas power plants are limiting generation to save on fuel costs.
Under the current outlook for futures gas prices, Northwest Europe and Italy will account for almost all the growth in LNG imports over the coming summer (April-September). BNEF’s base-case scenario sees global LNG imports rising 6% year-on-year in summer 2022, reaching 193 million metric tons. Asian LNG demand growth is at risk if European gas prices continue their trajectory and push up Japan-Korea Marker (JKM) spot prices.
Note: *Europe is defined as Northwest Europe, Italy, Austria unless stated otherwise.
Northwest Europe and Italy's LNG needs this summer under BNEF's base case scenario
Year-on-year growth in base case global LNG demand in summer 2022
Year-on-year
If Gazprom meets its minimum contractual arrangements with European buyers – meaning there are no disruptions to Russian flows – and TTF prices continue to stay higher than Asian spot LNG prices, BNEF’s base case scenario is that Europe* could end the summer injection season with gas storage levels reaching tank tops – 100% full.
In a situation where gas traders start to get comfortable with growth in European gas storage levels over summer – without seeing a disruption to Russian gas supplies – TTF prices will start to fall rapidly from current levels and, in turn, so will JKM. Thus, demand destruction in Asia will ease, returning some of the LNG flows BNEF currently sees destined for Europe to Asia.
Several factors will reduce LNG demand growth in Asia over summer 2022. China, which is now the largest LNG import market globally, is seeing multiple widespread Covid outbreaks, slowing economic activity and a loss of appetite for the chilled fuel given high prices. LNG imports to China will see additional downside pressure from higher Russian pipeline imports and more local gas production. Japan and South Korea will see lower LNG imports over the period given higher coal and nuclear generation, respectively.
South Asia and Southeast Asia, which were seen as LNG growth market hotspots for 2022, will now see lower demand as industry users switch to alternate fuels such as fuel oil. Pakistan and Thailand could still see LNG growth, however, with Pakistan starting a new contract for Qatari supply and Thailand needing LNG imports as local production declines. Growth in India will be stagnant with these high prices.
Europe gas supply scenarios
If Russian gas flows drop to 60% of BNEF’s base case, Europe will end summer 2022 with its gas storage near the five-year average level. This would likely be considered too low by the market given the downside risk to Russian gas flows during winter. However, with increased volatility in gas prices, the TTF-JKM spread could change very quickly, resulting in U.S. LNG netbacks being lower for Europe than Asia. This would lower LNG flows to Europe and reduce the region’s scope to curb its dependency on Russian pipeline imports.
BNEF’s base case currently assumes that Europe will receive some diverted, Asia-bound U.S. LNG supply over the summer, given the wide TTF-JKM spread and reports of redirected cargoes. However, should this not occur, Europe could see its end-of-summer gas storage levels fall by 16 billion cubic meters (Bcm) versus the base case, ending the season 82% full.
