LNG disruption on the horizon: Gas price update

This is the latest addition to the list of LNG facilities operating at less than full capacity and follows the outage at Equatorial Guinea LNG at the end of September.

According to Rystad Energy estimates, all of the ongoing and projected LNG production outages, could remove an incremental 4% of monthly supply (or 20 cargoes) off the expected market from November through February, adding to supply tightness and putting upward pressure on prices.

Asian LNG prices are also supported by tight fundamentals in Europe where, due to continuing competition from Asia and South America for LNG cargoes and limited prospects of additional volumes out of Russia in November, gas storage woes are set to continue.

In fact Europe is heading into winter with storage levels 20% below the low end of the 5-year range, risking rapid depletion in the event of a frigid winter.

In the US, Rystad Energy expects Henry Hub prices to remain elevated throughout the winter, reflecting the barely adequate storage levels at 5% below the 5-year average, amidst continuing capital discipline by drillers which has resulted in production lagging consumption and robust exports.

Our data indicates Sabine Pass and Corpus Christi LNG facilities are running at full tilt at nearly 110% capacity.

Asia spot and TTF prices have decoupled from all technical ceilings and are trading at elevated levels well before the peak winter month of January, and in theory could go to any price the next buyer is willing and able to pay.

Spot shipping rates have taken a sharp upwards trajectory, exceeding $200,000 per day (TFDE, Pacific) just days ago.

There is further upside potential for rates given the willingness of the market to pay for freight to capture the $25/Mmbtu arbitrage between delivered US cargoes and Asia Spot or TTF prices, and the likelihood of congestion at the Panama Canal.

Prompt charter availability is limited, however, as the past several months saw an uptake of shipping capacity on term basis. Therefore, market participants with excess shipping capacity (and length in LNG, for that matter) may be positioned for windfall profits this winter, similar to what we saw in January 2021.

Barring a very mild winter across all regions, there is little indication of a sharp downward correction in prices in the near term.  

Any bearish factors – such as improved nuclear power availability in Japan, or removal of voluntary coal restrictions in South Korea – are balanced by limited prompt cargo availability in the event of a cold winter, signs of which have started to appear by unseasonable temperature drops across North Asia.

Rystad Energy estimates that other supply side balancing factors, including the start-up of the Nord Stream 2 pipeline and the start-up of Calcasieu Pass and Sabine Pass Train 6 in the US, are likely to materialize in the first quarter of 2022, with upside risk to prices from any potential delays. 

LNG sellers are now reportedly offering slopes of more than 12%, as buyers return to the long term contract negotiating table, after the events of this year pushed prices to eye watering levels.

Rystad Energy LNG contract data shows an upward revision of LNG slopes from an average of 10.7% in 2020 to close to 12% YTD 2021, and may be explained by buyers looking to limit spot market exposure after the turbulence of this year.

Having more long term offtake may be a prudent approach as we see continuing spot price volatility and a material tightening of the LNG market towards 2025, by when we expect a supply deficit of almost 18 million tonnes or 4% of the demand.   

We also see this as positive for FIDs on yet-to-be sanctioned LNG projects, which have been languishing from lack of long term contracts  since the downcycle in 2020.