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Should I Stay Or Should I Go - Will Asia Start Pulling Large Volumes of LNG Away From Europe?

2022 was a particularly significant year for the global LNG industry, distinguished by a sharp increase in LNG demand in Europe tied to the reduction in flows of Russian pipeline gas after Putin’s invasion of Ukraine. Whereas Europe had historically been the last market option for many LNG sellers, it became the most highly priced market in the world and pulled in LNG from multiple locations, including a cargo from Australia delivered in October. Paying premium prices enabled European buyers to fill the continent’s underground storage at an unprecedented rate — as of mid-January, storage there was over 80% full. A mild winter, at least to date, coupled with conservation efforts and fuel switching have reduced European natural gas demand by 10% to 15% and helped avoid a gas shortage. Now, gas prices (and LNG cargo prices) have fallen to pre-invasion levels and prompted market observers to suggest that, with China emerging from pandemic-related lockdowns, Asia may start pulling large volumes of LNG its way. In today’s RBN blog, we examine LNG cargo movements within the Asia Pacific and Atlantic regions and what rising Asian demand could mean for European gas supplies going forward.

As global LNG markets have evolved over the past several decades, an increasing share of the LNG produced has destination flexibility — that is, rather than being committed to a specific buyer under a long-term agreement, LNG cargoes can be directed to the buyers willing to pay the most for them. The rise in destination-flexible cargoes helps to explain how continental Europe was able to draw a lot more LNG its way last year — 94.7 million tons (MMt; 12.5 Bcf/d) in 2022 versus only 54 MMt (7.2 Bcf/d) the previous year — after Russia’s February 2022 invasion of Ukraine led to sanctions and the cut-off of most piped-in Russian gas to European Union (EU) countries.

Russia’s decision to withhold pipeline gas supplies to European buyers resulted in record gas prices in Europe, which filtered through to the LNG market. Although holders of LNG import capacity in Europe were able to purchase cargoes at deep discounts to the continent’s benchmark Title Transfer Facility (TTF) gas price, the prices still exceeded those in Asia, making Europe the market of choice for many players. Further, the return of the Freeport LNG facility in Texas, which is expected in February or March, will also ease supply concerns in the Atlantic Basin and reduce the impact of diversions toward Asia. But as European prices have trended downward in recent weeks, some have expressed concern that if prices fall much further, significant volumes of U.S. LNG will be diverted toward Asia, especially China, and could pave the way for a new supply crisis in Europe and a bidding war for spot cargoes.

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