Global LNG balance

Russia-Ukraine war changes global LNG price and trade dynamics

Spot prices: LNG price dynamics to change as Europe is no longer a balancing market

JKM-TTF price evolution and potential US LNG imports into BNEF’s Europe Perimeter

Source: BloombergNEF, CME, Bloomberg Terminal. Note: Europe here is BNEF’s Europe Perimeter and includes Northwest Europe and Italy.

Europe's role as a balancing region for the global LNG market has shifted dramatically. As the continent looks to replace Russian gas, the function of being a balancing market is no longer viewed as the norm for Europe; instead, the market will see aggressive competition between the European TTF and Asian JKM price benchmarks to attract the necessary LNG.
Europe's flexible LNG capabilities drove the TTF-JKM price spread in previous years. Those dynamics have now been challenged by market forces such as Russian supply cuts, minimal coal-to-gas switching potential in the power sector based on the current futures curve and mandates placed on gas storage build-up. Gas price volatility is expected to continue in the medium term.

Contract supply: Flexible supply could grow by 54% from 2022-26

Flexible LNG supply refers to LNG supply available above destination-specific contract demand levels. BNEF assumes that destination-specific contracts will be given the highest priority from a plant and project’s perspective and will be allocated first. Portfolio players will then satisfy contract demand from customers that they have portfolio supply deals with. Thereafter, portfolio players are left with portfolio supply that is considered ‘flexible supply’. In addition, any excess production from LNG plants above contract commitment levels is also considered ‘flexible supply’ volume.

Flexible LNG supply can be optimized by portfolio players and traders depending on Asian and European spot gas price spreads. These volumes are typically optimized geographically, sourcing from the closest supply source. Asian markets are largely contracted, but they do require spot and additional purchases to a certain extent. Flexible supply will be more important in meeting Europe’s increased LNG needs over the coming years.

Flexible supply is expected to grow five times faster than total global LNG supply, at an average rate of 18% per year from 2022-26. Expiring contracts from Europe and the Americas are the main driver for this growth, freeing up supply in the Atlantic. Contracted demand from Asia, the Middle East and Africa is projected to remain relatively stable, growing a modest 3% over the period.

Source: BloombergNEF. Note: ‘Others’ include demand from bunkering, new import markets and operational losses. Supply considers sanctioned projects as of May 2022.

Northwest Europe and Italy are set to experience the biggest jump in LNG imports, adding 36 million tons worth of demand by 2026, compared to 2021. New terminals in Turkey and smaller European markets will increase their ability to import LNG. Ample regasification capacity in the Iberian Peninsula will help raise Spain’s imports, but gas demand faces headwinds from more renewables generation.

Japan’s LNG demand is forecast to drop 30% from 2021 to 52 million tons in 2026, amid higher nuclear, renewables and coal generation. Meanwhile, South Korea’s LNG demand is expected to fall in 2023 due to lower gas demand for power coupled with nuclear capacity additions. The country’s LNG imports may level out after that as coal power plants retire. China could see LNG imports drop in 2022 due to severe omicron outbreaks and high import costs. However, China’s LNG demand is expected to rebound from 2023 onward as the pandemic is brought under control and coal-to-gas switching initiatives continue. South and Southeast Asia will likely see limited increases in LNG demand as high spot prices curb buying interest in these markets.

JKM-TTF dynamics have drastically swung in favor of TTF. Which market holds a premium will largely be dictated by short-term demand factors, with Europe likely absorbing a major share of spot volumes – as evident with the current futures curve outlook. Highly price sensitive spot supply and flexible free-on-board cargoes will continue to arrive at the higher priced hubs. BNEF expects a major portion of total spot supply will make up European LNG imports based on the current futures curve, largely sourced from the US.

The LNG consumption increase in Europe is effectively trying to push up an inelastic supply curve because LNG capacity additions are already slated for 2022-25. Regasification capacity is being added across Europe to expedite an increase in LNG imports. Under current market price views, LNG will continue to arrive in Europe at high rates.

Global LNG demand: Fall in Japan-Korea-Taiwan market makes room for growth in Europe

Source: BloombergNEF. Note: JKT is Japan, Korea and Taiwan. ‘Others’ includes Middle East, Americas, Africa, other Asian markets and bunkering. Figure is demand based on normal weather (10-year average) and current futures prices.

Source: BloombergNEF. Note: Northwest Europe refers to France, the UK, Netherlands and Belgium. ‘Other Europe’ is Portugal, Poland, Lithuania, Greece, Malta, Sweden, Finland, Gibraltar, Norway, Croatia, Russia, Gibraltar and Cyprus.

Global LNG demand in 2026 could reach 444 million tons, up 18% from 2021. Europe is expected to drive most of the LNG demand growth as the region aims to cut its dependence on Russian gas. China, and South and Southeast Asia could see LNG imports climb, but growth will be constrained by high spot LNG prices. The Japan, Korea, Taiwan (JKT) region is the only major market forecast to see a decrease in demand.

Risks to Asian contracted demand are falling production at Southeast Asian projects and Australian outages. If output is unable to meet contracted demand, then Asian customers will need to resort to supply from outside the Pacific Basin.

We anticipate that Asian demand can be fully met by supply from the Pacific Basin and the Middle East once Qatar’s North Field Expansion Phase 1 begins in around 2026-27 – this production is currently uncontracted but included in the flexible supply forecast. This will release more Atlantic Basin, particularly US, supply to satisfy demand in the geographically closer European market. Additionally, new project supply from Canada, Mozambique and Australia is largely contracted to Asian buyers, so Europe will get more flexible supply from the Atlantic.

Global LNG supply: US becomes LNG powerhouse with 113 million tons of supply in 2026

Source: BloombergNEF, Bloomberg Terminal’s AHOY JOURNEY. Note: ‘MEA’ refers to Middle East and Africa, PNG refers to Papua New Guinea, Eq. Guinea refers to Equatorial Guinea, UAE refers to United Arab Emirates. Mauritania includes Tortue FLNG, which is on the maritime border of Mauritania and Senegal. Numbers are rounded.

Global LNG supply is forecast to reach 460 million tons in 2026, up 19% from 2021. The majority of the growth is driven by a ramp-up of new projects, bringing a total of 93 million tons of supply growth in 2026 versus 2021. The US represents 41% of this increase. This is offset by an anticipated decline of 20 million tons, mostly from ageing plants. Growth is estimated to be largest in 2021-22 owing to new capacity and projects resuming from outages.

Under construction: Countries showing supply growth are predominately a result of new projects starting, except for Norway. Calcasieu Pass, Golden Pass and newly-sanctioned Plaquemines in the US are responsible for the bulk of new projects slated to start by 2026, with a combined nameplate capacity of 62.5 million tons. Expansions and debottlenecking in Qatar, Nigeria and Australia also add to the growth outlook. Arctic 2 LNG is expected to drive growth in Russia, but the project faces significant sanctions risk, and first LNG production could be delayed.

Operational: Decreasing gas output from fields supporting older facilities will reduce supply from these plants. The largest declines are set to come from Malaysia, Brunei and Algeria, whose plants have been operating for an average of 44 years as of 2022. Some projects such as MLNG Satu, Brunei LNG and Arzew LNG are expected to see falling LNG production due to maturing feedgas supply.