Will 2021 Natural Gas Market Be Boosted By LNG?
“Cold weather in northern Asia has lifted the JKM marker price to its highest level since 2014. The high gas price is drawing LNG cargoes from everywhere, which will help the European and U.S. LNG markets recover. ”
Although the Midwest and Northeast sections of the country have battled significant snow storms, really cold temperatures have yet to grip the nation. As a result, since the early cold snap a few weeks ago, natural gas prices have fallen in recent days. From over $3 per thousand cubic feet (Mcf) in early November, natural gas futures prices fell as low as $2.40/Mcf a month later. Since then, gas prices have struggled, but they have risen to around $2.70/Mcf, a 12.5% increase. However, gas prices are exhibiting increased volatility. Over the last month, natural gas production hasn’t fallen as much as analysts expected, thus the long-term outlook for natural gas prices has moderated. Whereas early this winter, analysts thought we could see gas prices in the $3.25-$3.50/Mcf range, now the idea of getting above $3/Mcf seems to be virtually unattainable.
The single most important factor helping to lift natural gas prices has been the pick-up in LNG shipments, reviving an industry sector brought to its knees by the coronavirus’s impact on global energy demand, especially for natural gas. According to Platts’ count, 175 Gulf Coast LNG cargoes were canceled for loading between April and November due to weak economies from global shutdowns around the world. That has dramatically changed in recent weeks, and is likely to remain changed into the new year, due to the arrival of cold winter weather in the northern Asian markets of China, Japan and South Korea, all major gas importers.
On December 15th, the Japan-Korea-Marker (JKM) price for natural gas reached $12.40 per million British thermal units (mmBtu), up 81% in the past month and 564% from the April 28, 2020, low of $1.825/mmBtu. Even with the roll in futures pricing from January 2021 to February 2021 (closer to the end of winter demand), the JKM only fell to $12.12/mmBtu, signaling that market participants expect winter demand to remain strong for a while longer, necessitating the region securing more LNG supply.
With LNG prices above $12/mmBtu, the JKM is at the highest level it has been since 2014. This dramatic a move in the JKM is having an impact on the current operation of the LNG market, as well as setting the stage for a longer-term impact. While winter weather in northern Asia is driving up heating demand for natural gas, other industry events are sustaining the price rise. Outages at LNG production hubs, combined with congestion along global shipping routes, have helped drive prices higher.
The rise in international LNG prices began toward the end of September when Qatar experienced compressor problems at one of its main liquefaction trains. This was followed by operational problems in Norway and the United States, the latter due to hurricane damage and power outages. As these LNG terminals began to return to service, shipping congestion at the Panama Canal forced some LNG carriers to head to Asia by taking longer routes. In many cases, those routes would be around the Cape of Good Hope in South Africa or Cape Horn off the tips of Chile and Argentina. A few ships might have opted to go through the Suez Canal. As the Energy Information Administration’s chart and map show, the distance from the U.S. Gulf Coast through the Panama Canal to Asia cuts eight to eleven days off the journey. It is estimated that the additional travel time and distance has raised the cost of getting LNG to South Korea by $2/mmBtu, further inflating the delivered cost of gas in Asia.
Exhibit 8. LNG Cargo Travel Routes To Market SOURCE: EIA
The colder weather in northern Asia, and the continuing La Nina weather pattern keeping temperatures colder in the region, will keep heating demand for gas strong. While expectations are that these patterns will change, the timing is uncertain. More expensive gas in Asia is pushing utilities in the South and Southeast Asia areas to switch back to coal, especially in countries where supplies are plentiful and environmental restrictions weaker.
As an example of the impact of this sudden price rise for LNG in Asia, one should consider the impact on China Petroleum & Chemical Corp., otherwise known as Sinopec. In September, Sinopec purchased nine cargoes of LNG to be delivered in between November and March 2021. The price for JKM at the time of the deal was $4.55/mmBtu, but it was indexed to JKM. As a result, Sinopec has seen its gas cost rise by nearly 170%.
What is most interesting is the impact of the JKM price rise on the global LNG market and its implications for the U.S. LNG industry. The sharp JKM price increase has diverted LNG cargoes away from Europe and toward Asia. This means Europe is drawing down on its record gas inventories. With JKM trading at the highest premium to the Dutch and U.K. gas benchmarks since 2014, this shift in cargoes will continue. That will help boost European gas imports during 2021, meaning there is less risk of another gas glut developing that would force Gulf Coast cargo cancellations. It also means the expansion of the domestic LNG business will be supported, leading to ‘final investment decisions” on several of the new terminals under development.
On December 7th, Cheniere Energy announced that its Train 3 at the firm’s Corpus Christi terminal had loaded its initial commissioning cargo. This will add about 700 million cubic feet per day to the LNG gas feed rate, the amount of domestic gas flowing from producing wells to LNG terminals, pushing the total to more than 11 billion cubic feet per day (Bcf/d). The EIA’s Short-Term Energy Outlook for December estimated that November dry gas production in the U.S. was 89.6/Bcf/d. It also estimates that net LNG exports were running at a 9.2/Bcf/d rate, or slightly over 10% of domestic supply. Assume that gas production remains at this level, lifting the feed gas flow to 11/Bcf/d will push LNG’s share of domestic gas output above 12%, which will likely grow further. That prospect was captured in a chart from a gas market report by Grand View Research. Under their outlook, growth will steadily increase, driven primarily by increased use of gas in power generation. As the world’s energy system decarbonizes, coal will be displaced by natural gas.
Exhibit 9. U.S. Natural Gas Market Outlook SOURCE: Grand View Research
In 2019, according to Grand View Research, LNG’s supply for the power generation market represented 47% of total market. The push to decarbonize the world’s power markets suggests that LNG will continue to gain market share, as renewables are less appealing cost-wise and operationally for utilities. Substituting natural gas for coal, adding somewhat to the transportation fuel supply, is what will drive LNG demand.
Exhibit 10. The 2019 Global LNG Market Share SOURCE: Grand View Research
As someone commented in a discussion about the changes in the Asian gas market, “this will change.” Yes, weather and climate patterns will change. The cold weather will moderate, reducing the need for gas for home heating. The decarbonization effort, however, will continue, and that will provide a foundation for natural gas demand growth for years to come. In developed economies, natural gas is rapidly becoming the next target of environmentalists due to its carbon footprint. However, the developing world, which is heavily dependent on coal and biowaste, will find it easier to embrace gas over renewables due to operational considerations.