The global LNG market has absorbed much of the disruption caused by the Middle East conflict through demand destruction in Asia, with prices yet to reflect the real impact of lost supply, panellists said at the FT Global Commodities Summit in Lausanne on Tuesday.
The LNG market has adjusted through heavy demand destruction in Asia, mostly through coal being substituted for gas, according to Vitol global head of LNG Pablo Galante Escobar.
Government-driven energy saving measures, lower fertiliser production, and optimisation of domestic gas production have also cushioned the shock in Asia, global head of research at trading firm Six One Commodities Aimie Parpia said. A mild end to winter and higher LNG stocks than in Europe have limited Asian buyers' spot market participation and procurement of replacement cargoes, she said. For this reason, "we haven't really had cargo competition. If you want to buy a spot cargo at the moment, you can if you want to pay the price", Parpia said.
But this equilibrium cannot be sustained long term because "demand destruction cannot persist for another six months", Escobar said. "The gas price, when you look at it from a physical point of view, is mispriced" and "lower than what you would need to balance the market", he added. As soon as cargo competition emerges between the Atlantic and Pacific basins, pressure may build, Parpie agreed.
Trading firm Mercuria's global head of LNG, Julien Bourdeau, agreed that the physical market has yet to price in the extent of the shortage. "Gradually, the market is going to analyse the real situation — I think that is what we are going to see in the next few weeks, a realisation of where we are," he said. "If the price is not solved, there is going to be some tension."
As the crisis continues and we get closer to winter, the more Asian demand will increase and the more prices will react, German utility Sefe's chief commercial officer, Frederic Barnaud, said. Today, we do not see much tension in flows to Europe, which is reflected in prices and the shape of the curve, he added.
Destruction of production capacity in Qatar as well as delays to new projects are poised to cut around 20mn t/yr of supply in 2027-28, Escobar said.
