There has been a big change in the world of liquefied natural gas in the last 60 years: the rise of two new superpowers, the U.S. and China, who are causing more uncertainty and price changes in a once-stable commodity market.
Overtaking Japan for the first time since the 1970s, China became the biggest importer of liquefied natural gas in December, making them even more important than they were before. The US is set to become the world’s top exporter of fossil fuel later this year, beating out Qatar and Australia, two of the main suppliers.
There isn’t as much information about China as there used to be about the two superpowers. There have been big changes in the prices of LNG since the commodity became traded, just like crude oil. To keep up, trading desks have been popping up all over the world. Japanese LNG companies like Jera Corp. and Tokyo Gas Co. have set up their own, while banks like Macquarie Group and Citigroup Inc. are hiring traders to make money from the volatility.
Gas prices have never been this volatile before. They’re trading up and down on a single day in ranges that they didn’t even cover for decades. The price of European natural gas hit a record high of 180 euros per megawatt-hour in mid-December. Then, prices fell more than 60% in the next 10 days.
The changes have given China a lot of power in the market because it can now have a big impact on both short-term and long-term prices.
Moscow analyst Ronald Smith says that some of his clients spend hours looking for small details out of China, like the number of trucks that have switched from diesel to natural gas. But, he said, it can be hard to get data that can help predict how much Chinese people will buy things.
It could be very interesting if China’s demand for gas grows faster or slower than the market thought, said Smith. Gas prices could be very high or very low. “Predicting US supply is easier,” he said, but there are also times when things go awry, like cargoes that were supposed to go to Asia instead going to Europe.
For most of its history, LNG, which is natural gas in liquid form, was only bought and sold through long-term contracts. It was used for everything from transportation to heating. That was a simple way to get fuel from one country to another, using old pricing systems that were based on crude oil.
During the last 10 years, hydraulic fracturing has opened up a lot of shale gas reserves in the United States. This has turned the country from a net importer of the fuel to a net exporter. After a new terminal opens in Louisiana in late 2022, the U.S. will have the world’s largest export capacity by the end of that year.
Contracts for U.S. LNG are some of the most flexible in the industry. Buyers can take their gas to where it’s most needed, or to whoever is willing to pay the most. Customers can pay a fee to cancel the whole shipment if it’s not worth it. This happened in 2020 when spot prices fell to record lows, which is what happened. This is great for quick traders who want to make money by taking advantage of price differences between countries.
American LNG producers also broke with the industry standard of selling cargoes linked to crude oil. Instead, they sold cargoes linked to the domestic Henry Hub gas marker, which is the main price point for U.S. futures contracts for the fuel and the name of the delivery location in Louisiana where several pipelines meet.
U.S. gas prices have been lower than those in other countries because of strong shale production.
The US, on the other hand, has become more powerful in the market. Record-breaking gas prices in the last month were brought down by a surge in American LNG deliveries to Europe. Russian supplies were still low.
Still, the more flexibility the U.S. has brought in comes with a whole new set of problems that need to be solved. Hurricanes in the U.S. Gulf of Mexico are now a big concern for traders. Political action, like stricter emissions rules, could make it more expensive to ship LNG.
There are also risks because the U.S. and China are rising at the same time. Just a few years ago, China and the United States were in a trade war. LNG was thrown into the mix. In response to American levies in 2018, China temporarily stopped importing U.S. LNG cargoes or signed long-term supply contracts.
U.S. and China becoming more powerful is “a big shake-up,” says Nikos Tsafos, the chair of the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies. There is a “possibility” that their disagreements could cause problems in the market.
China opened its first LNG terminal in 2006, and in 2015, it only imported 20 million tonnes of the gas. That’s only a quarter of what Japan delivered that year. That quickly changed as China moved quickly to switch from coal to gas to heat homes and power businesses in order to cut down on pollution.
China’s long-term demand, which now stands at about 80 million tonnes a year, is a huge business opportunity for both long-term suppliers and a group of newcomers. Some people don’t know much about China, but that’s about to change. As many smaller, so-called “second-tier” LNG importers start to enter the market, they’re looking for deals and spot shipments.
There could be a lot of problems if China’s government suddenly decides that it needs short-term deliveries to feed its economy or that there are sanctions because of a geopolitical fight.
Tsafos said that China is “one country whose decisions can move the spot LNG market,” and he agreed.