LNG – HAS SUPPLY OUTPACED DEMAND ?
In Q1 2023, the question on everyone's minds is not where the snow has gone or if Open AI will replace my job, or will my Bonus big be BIG ( the latter is a given in commodities ), but it's whether the supply of LNG has outpaced demand.
In 2022, the U.S. saw a record amount of liquified natural gas (LNG) exported to help Europe replace the gas that Russia had stopped providing through pipelines, which was a fantastic bit of luck for us Europeans and a remarkable coincidence that the US had so much in supply to help us out. On a side note, how is the repair of Nordstream going ?
Anyway, many companies that processed and transported LNG profited as importers competed for their services, in which we saw some epic contracts being signed. However, the trade has reversed in recent weeks as LNG prices have fallen.
The decrease in demand for natural gas is attributed to warm weather in Europe and reduced industrial capacities as the economy slows. This has caused the benchmark price of European natural gas to fall to around $20 per million British Thermal Units, the lowest since September 2021 and about one-third of the price in the middle of last year.
The abundance of domestic supplies in the U.S. has also led to a drop in natural gas prices, which now sit at less than $4. European natural gas storage levels are now predicted to end the winter at about 50% of capacity, twice as high as last year, according to Morgan Stanley.
The supply of LNG is growing faster now, and buyers no longer have to compete as aggressively. It's important to note that Chinese demand for LNG also fell about 20% in 2022 as the country continued strict Covid lockdowns. Though demand bounced back somewhat late in the year, it was still down about 12% on a year over year basis by December. As China reopens, it could take a while for demand there to return to previous levels.
The drop in prices is likely to hurt the earnings of our Commodity Trading Giants in 2023. As a result, some internal trimmings may occur to retain profits, so don't get too comfortable.
The LNG market has been profitable in the past year, but it remains to be seen if supply will continue to outpace demand in 2023.