LNG supply and demand creates continued volatility

As European gas prices continue to make headlines across the world, SSY LNG analyst Thanos Felios looks at what’s behind the rise of LNG prices and the impact this has on the LNG Shipping market.

Supply from Russia

With Europe relying on Russia for around 35% of its natural gas, the increasing geopolitical tensions between Russia and the West have continued to disrupt supplies, which have been lower than usual in recent months. Any further sanctions on Russia from the US are likely to further impact supplies.

Low storage levels

European gas storage supplies are low. The gas storages are mainly used as buffers during events of high demand and tight supply, but storage levels are low due to two main factors:

• The delayed and prolonged cold winter of Q1-2021
  
• The struggle to rebuild gas stocks during the summer period of 2021 due to the incredible hot weather (the summer of 2021 was Europe’s hottest on record).
  

A tight LNG market

Power and gas demand has also been strong in Asia which pulls LNG away from Europe. This is due to a combination of 2021 post-COVID economic recovery, the cold winter of Q1-2021, and the determination of the LNG buyers not to be ‘caught short’ in the winter of 21/22. This triggered a continuous price rally between JKM and TTF, which led both indices into new all-time highs during 2021.

Severe drought in South America has limited hydroelectric output and this has pulled a significant amount of Atlantic’s LNG volumes.

On top of this, various LNG facilities have experienced outages which has taken a significant volume of LNG supply off the market. i.e., The Hammerfest plant has been out of service since September 2020.

Rising Carbon prices

High European carbon prices have forced power generators to cut coal and use more gas. Carbon prices in Europe reached all times highs in 2021 as the EU reduced the supply of emissions credits, forcing highly polluting providers of energy production to reduce their reliance on coal.

Thanos Felios, LNG Analyst at SSY commented “The very high LNG pricing environment that we are witnessing in Europe is unprecedented. The situation that we are seeing continues a rhetoric of extreme Gas/LNG pricing volatility. This in turn has resulted in a more and more volatile shipping market.

“Over the last 18 months, since the end of the first European covid-19 lockdown, LNG shipping has seen monumental highs in terms of “dollar per day” charter rates. We have also witnessed, as we are now, very low charter rates and rising shipping availability. In simple terms many more ships are staying in the Atlantic Basin (due to high EU demand) and not sailing to the Far East during the end of winter / start of spring. This has resulted in shorter tonne miles and less demand for tonnage to transport the LNG molecules.”