One of the world’s fastest-growing commodity markets is under great pressure — but it’s healthy. LNG prices are depressed amid destruction in demand, in large part due to the Covid-19 pandemic stalling the global economy.
The first big economic punch to the LNG gut started with swathes of virus cases in China — the world’s second-biggest LNG buyer — at the start of the year. This negative impact on LNG appetite intensified as the spread accelerated worldwide.
But signs of recovery are already emerging — surprisingly so. We are seeing demand return in Asia and we traded more LNG cargoes in the last month than we did in our entire portfolio in 2015. In the last few weeks alone, we have traded around 25 cargos (appetite partly spurred by today’s low prices, of course).
What does this mean? For one, the market is robust. The strong liquidity and mix of dynamic players are paying off during these strained times. It also reflects the power of the message from governments — we will not allow the economy to fall off a cliff amid Covid-19.
Such rallying cries are invaluable as nations rethink their energy demand portfolio during what the International Monetary Fund (IMF) thinks could be the worst economic crisis since the 1930s.
Liquefaction owners, or whoever owns the capacity for that liquefaction, are feeling the economic burn most keenly. The LNG market does not have an Opec+ equivalent. No collation of producers is orchestrating supply-demand dynamics to support prices.
Market forces alone prevail, i.e. vast oversupply, low prices and full storage. The domino effect is clear. For one, Qatar is pushing back the start-up of the first phase of its North Field expansion project by up to six months, entering production in 2025 instead.
Meanwhile, the US’ LNG export market, the world’s third largest, also has issues. The glut of supply means many projects have financing difficulties unless they have an off-taker already agreed.
In turn, off-takers are examining their risk profiles with more scrutiny than ever. This all pushes the pressure back up the chain, with early-stage projects taking the greatest hit. Still, creative solutions often arise from challenging situations. I believe this squeeze will result in more innovation and efficiency along the supply chain.
Demand destruction amid Covid-19 isn’t entirely responsible for today’s oversupply. In Europe for example, appetite has been hit by two warm consecutive winters, including balmy days in January in England. Heavy rainfall and strong winds mean renewable power generation is also high.
Overall, European gas tanks are at their highest level ever. Yet, the continent continues to receive vast amounts of LNG. Why?
There is simply no other place to pour it. Let’s not forget the environmental angle to the equation; an inevitable demand source that should provide some support at some point.
Considered the “greenest” fossil fuel, LNG is a much-needed energy bridge to achieve the lower carbon growth in the Paris Agreement. What happens next in the LNG market all boils down to two points: whether the global economy has a U-shaped or L-shaped recession and recovery and how long it takes to be realised.
The jury is still out. Stay safe and stay well.
- Keith Martin is CEO, Uniper Global Commodities.