Global LNG "Scramble" Intensifies as Hormuz Strait Remains Closed

SEATTLE (Oil Monster): With the Strait of Hormuz still closed, the global export of liquefied natural gas (LNG) has been severely affected, and an energy " grab" battle is already under way across the Eurasian continent.

"The current LNG spot market is so competitive that any physical contract released into the market will be immediately absorbed by buyers," said Henik Fung, a senior analyst at Bloomberg Industry Research (BI) Global Energy team, in an interview with the reporter of the first financial. He also warned that even if the geopolitical conflict ends in the short term and the strait is reopened, the competition for the rest of the next 3 to 6 months will still be very strong because the inventory has been consumed in the past period.

According to the U.S. Energy Information Administration (EIA) data, under normal circumstances, about 20% of global LNG needs to be transported through the Strait of Hormuz, of which about 80% to 90% flows to the Asian market, while the current situation in the Middle East has almost "cut off" this supply. At the same time, although most of the natural gas imports in the EU come from regions other than the Middle East, the butterfly effect triggered by this global supply disruption is forcing European buyers to compete fiercely with Asian buyers for the limited flexible LNG spot ship cargo in the market.

As a result, the Henry Hub spot price, a benchmark for Asian natural gas, has recorded a 65% increase since the end of February, according to data from the InterContinental Exchange (ICE), while the TTF price in the Netherlands, a benchmark for European natural gas, has also surged nearly 60%.

On the underlying logic of the soaring commodity prices, Roukaya Ibrahim, chief commodity strategist at global investment consultancy BCA Research, told the first financial reporter that as the global visible official inventory oil depots are drawn down to historical absolute extremes, the "safety cushion" that consumers and market institutions can rely on will be extremely compressed. This will inevitably force the center of crude oil and natural gas prices to be severely revised upward in order to offset the risk of the strategic reserve bottoming out in pricing.

European winter stockings face severe tests

At present, it has become a fait accompli that European countries have started the replenishment process in advance. Feng Han Nan told the first economic news that the current natural gas stockpiles in Europe are at a multi-year low, and the EU has issued a warning to member countries, predicting that the supply gap of LNG this year will significantly expand. Therefore, countries have to prepare in advance for the winter reserve from March and April.

However, the actual stock data is not optimistic. According to the data from the Swiss Federal Office of Energy, as of the latest update on May 15th, the storage levels of the EU's gas facilities were only 36.1% full, a full 13.4 percentage points lower than the five-year average (49.5%).

Before the heating season begins, the EU usually requires a 90% fill rate for gas storage. EU law allows countries to have a 10 percentage point deviation from this target and an additional 5 percentage points of flexibility in the event of extreme adverse market conditions, but the European Network of Energy Regulators (ACER) recently issued a warning that it expects the EU countries will not be able to meet the EU-mandated requirement to fill gas storage to 90% of capacity before the winter season this year, and will only be able to achieve a lower 80% fill level. However, achieving this level "is likely to require a significant premium cost" and is vulnerable to subsequent supply disruptions due to the lack of buffer. The agency calculated that to achieve a 90% fill rate, the EU’s LNG import volume would need to increase by 13% compared to 2025.

Faced with high costs and stretched supply chains, the European Gas Association (Eurogas) and the International Association of Oil and Gas Producers (IOGP) have both called on the EU to give the market more flexibility in meeting this season's gas storage targets, to avoid excessive market pressure during the summer injection (replenishing inventory) season.

Meanwhile, the issue of path dependence on a single supplier in Europe has resurfaced. Since 2021, imports of US LNG into Europe have increased by a factor of two. Last year, 58% of the liquefied natural gas in the region came from the United States, which is about 25% of its total natural gas consumption. In this regard, ACER clearly warns that the EU's high dependence on US liquefied natural gas may trigger a deep questioning of the market's dependence on a single supplier.

The full-scale battle for trans-Asian and trans-Pacific cargo sources begins

"The trans-oceanic bidding war in the Euro-Asian economy is not only inevitable, but has already begun," said Ibrahim.

Ibrahim further elaborated on the transmission mechanism of this game. In terms of geographical exposure, about 90% of the LNG exported through the Strait of Hormuz flows to Asia, and Europe's direct physical exposure is minimal. This means that, superficially, Europe seems to be relatively "unscathed" from this supply disruption. However, the natural gas spot market is highly globalized, and the Japan-Korea Marker (JKM), which serves as the pricing benchmark in Asia, and the TTF price in the Netherlands, which serves as the core pricing center in Europe, have recently shown a synchronized surge.

In her view, the underlying cause is a "domino effect" that is under way: the extreme shortage in Asia has sparked a fierce battle for global supplies and has already pulled some of the resources away from Europe. For example, the US LNG fleet that was originally scheduled to sail to European Atlantic ports and some of the US refined crude oil exports have now changed course and are heading to Asia in response to the "temptation" of high premiums offered by Asian buyers.

In this changing situation, Feng Han-nan further stated that the current difficulty of restocking in Europe is extremely high. The global LNG supply is highly concentrated in a few countries, including the United States, Qatar, Australia, Russia, and Malaysia. Among them, Qatar's supply accounts for about 20% of the global supply. Due to the damage to related facilities in this conflict and the uncertainty of the maintenance and inspection cycle, it directly leads to a hard supply gap of about 20% in the market.

Feng Han Nan analyzed that: "In this context, European buyers will inevitably turn to the United States to seek alternative supplies. However, the issue lies in the fact that the utilization rate of the U.S. liquefaction facilities is already close to saturation; and Australia's production capacity is mainly locked in Asia through long-term agreements. Therefore, even if the Strait of Hormuz is reopened, it is difficult to fundamentally reverse the tight supply situation in the short term. With the arrival of summer, as the demand for power generation and air conditioning for heat relief surges, LNG demand will further strengthen."

Based on this judgment, Feng Hannan expects that the recent Asian LNG spot price JKM will fluctuate violently in the range of 15 to 20 US dollars/MMBtu. If the conflict cannot be resolved for a long time, the price center will continue to rise.

What is more worrying is the structural gap in the medium to long term. From a long-term perspective, demand for LNG in the Asian market without long-term contracts is continuing to grow between 2027 and 2030, according to Feng. Typically, downstream companies lock in about 75% of their demand through "take-or-pay" agreements. However, some companies had expected the Asian LNG market to be oversupplied, so they did not hedge fully or sign long-term contracts. As the gap between actual consumption and signed contracts widens year by year in the next four to five years, how to fill this gap will be a thorny issue.

Impact far exceeds previous energy crisis

Looking at the long-term scenario, Feng Han-nan said he believes the current shortage of LNG in Europe and Asia could be more severe than the energy crisis in 2022. He explained: "The Russia-Ukraine conflict in 2022 mainly caused a sharp shock to the European energy market, but the turmoil in the Middle East situation has a stronger global premium. More importantly, the current market seems to have not yet fully prepared for this, and the global psychological expectation for sudden supply disruptions is lacking."

Moreover, the physical destruction of the core supply side cannot be overlooked. Han Nien added that although Russia's supply was hindered in 2022, the current global core liquefaction supplier, Qatar, whose production equipment was damaged in the conflict, directly led to the paralysis of about 20% of the global supply capacity. The potential negative impact of such a scale of hard supply shortage on the global economy may far exceed that of 2022.

Ibrahim also added that there is a clear difference between the current natural gas and oil markets. Since the outbreak of the situation in the Middle East, the volume of natural gas that can pass through the Strait of Hormuz has basically been zeroed, while in the oil market, some sporadic volumes can still be seen to continue. There is currently no "bypass" mechanism in the natural gas sector, in contrast to oil, which has ready-made oil pipelines in the United Arab Emirates, Saudi Arabia, and Iraq, which has alleviated some of the supply pressure to some extent.

"I think what it means is that as long as the Strait of Hormuz remains blocked, the gas market could remain tight," Ibrahim said, noting that given the damage and attacks on Qatar Energy's liquefied natural gas facilities, the disruption could be quite prolonged, in terms of time.

But she also said that, in terms of the future evolution of the gas market, the good news is that a considerable amount of new LNG capacity is planned to come on stream in the coming years, starting from the second half of this year. Therefore, this should help alleviate some of the pressures in the gas market. "If we assume a very optimistic scenario where the Strait is reopened within five months, then the ultimate impact on global LNG supply will be a reduction of about 6% in LNG supply in 2026. And if we compare it with the new LNG supply expected to come on stream in the second half of this year, which will bring about a 5% increase in supply, this will offset part of the impact of the supply disruption, but it cannot completely offset it," she said.

Based on this, Ibrahim said: "This means that prices will be high for a period of time, but I don't think prices will experience another major surge unless this supply disruption becomes more prolonged. Because over time, new LNG capacity in other parts of the world will come into play, bringing a hedging effect."

Courtesy: www.sunsirs.com