Supply and demand factors
LNG is a product directly impacted by the Natural Gas supply and demand: LNG is NG that is liquefied. We then have to look at the supply side which is the amount of natural gas production, the amount of gas in storage and the volumes of imports/exports. The price variations will also affect the supply side: a decrease in the price will reduce production and sales of stored gas, while an increase in price will tend to show the opposite trend.
On the demand side, we can observe factors such as the weather (winter/summer), the petrol prices (substitute) and the economic growth and policies in a country.
If we look at this graph again, which shows the American consumption of gas over the years, we can definitively observe a seasonality due to the weather: cold weather increases demand for heating while summer increases demand for cooling, meaning a higher electricity consumption (since many electric power plants are fuelled by NG, it directly affects the demand). This example could be used to explain NG consumption in other countries such as Japan or South Korea since NG is used for the same purpose.
Price
The two biggest LNG importers are Japan and Korea (accounting for 34% and 15% respectively in world LNG imports), since they have no access to pipelines. Prices of NG there is different and higher than other NG markets (US: Henry Hub; Europe: NBP) since it includes cost of freights and gasification/regasification costs (see graph here).
Inventory levels of LNG
The demand of LNG increases during the winter when people need natural gas to produce the heat. During the winter, the inventory level of LNG is low because of the peak demand of the market. The opposite occurs during the summer when the climate is pleasant. In this period, the inventory level of LNG tends to increase.
The seasons are also linked to the spot and future price of LNG. During the winter, the spot price of LNG is higher than the forward price, and during the summer it is the opposite.
The present price of LNG
As shown in the Asian LNG prices’ graph, the spot price of LNG is equal to $12 per mbtu. The spot price of NG (Henry Hub) is equal to $3.53. The differential between these two commodities is equal to $8.47.
As we can see on the natural gas’ forward price curve, the forward price is currently equal to $3.84. In order to know the liquefied natural gas’ forward price, the differential of $8.47 shall be added to the natural gas’ forward price and gives $12.31.
By comparing the LNG’s spot price and LNG’s future price, we determine that the forward price ($12.31) is equal to the spot price ($12). The demand of LNG will probably raise in the next months. We will see if the spot price will be higher.
Long-term recommendation – US/China trade war
The winter period in China might be seen as a factor which makes the Chinese market as a bullish market for US LNG suppliers. However, the trade war between China and USA has led to a tariff of 10% on US LNG imports. Because of this tariff of 10%, China had to find some alternatives to avoid this impact on the LNG demand of the country. Indeed, China tied deeper its trade with Russia and is developing a pipeline project for transporting gas from Siberia. Moreover, China shows a high interest to join the pipeline “TAPIA”, which is a pipeline project that involves importing natural gas from Turkmenistan through Afghanistan, Pakistan and India. These projects will help China to prepare for a future increase in demand, since the country is seeing to become the world’s biggest market of natural gas. The consequence for the US would be to loss its market share in China, simply because China will probably not invest in US LNG anymore. In order to avoid a huge deficit for the US, Trump had to convince EU countries and Japan to increase their imports of US LNG.
LNG market shows some opportunities and possible growth in the supply and demand side. However, since the US/China trade war, LNG is becoming more a diplomatic concern. We recommend to pay attention to LNG market which might show a positive or negative fluctuation on the price.
References
TAKESHI, Kumon, 2018. “US-China trade war weaponizes liquefied natural gas.” Nikkei (online). October 9, 2018. (Consulted on November 7, 2018). Available to the following URL:
https://asia.nikkei.com/Spotlight/Asia-Insight/US-China-trade-war-weaponizes-liquefied-natural-gas
BP, Natural Gas Prices. (Consulted on November 8, 2018). Available to the following link :
https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/natural-gas/natural-gas-prices.html
ITC, Trade Statistics For International Business Development. (Consulted on November 8, 2018). Available to the following link :
https://www.trademap.org/(S(ki1e5knkr0ide3lrwd52fdsq))/Country_SelProduct_Map.aspx?nvpm=1%7C%7C%7C%7C%7C271111%7C%7C%7C6%7C1%7C1%7C1%7C1%7C1%7C2%7C1%7C1. Consulted November 2018
EIA, 2017. « Factors Affecting Natural Gas Prices ». EIA (online). August 23, 2017. (Consulted on November 8, 2018). Available to the following link :
https://www.eia.gov/energyexplained/index.php?page=natural_gas_factors_affecting_prices. Consulted November 2018
EIA, 2018. “Short-term energy outlook”. EIA (online). November 6, 2018. (Consulted on November 8, 2018). Available on the following link:
https://www.eia.gov/outlooks/steo/marketreview/natgas.php
YCHARTS, 2019. “Henry Hub Natural Gas Spot Price”. Ycharts (online). November 5th, 2018. (Consulted on November 12th, 2018). Available to the following URL:
https://ycharts.com/indicators/natural_gas_spot_price
TERAZONO, Emiko, 2018. “LNG prices leap on strong Chinese demand.” Financial Times (online). October 2nd, 2018. (Consulted on November 7th, 2018). Available to the following URL:
https://www.ft.com/content/e54e6392-c332-11e8-8d55-54197280d3f7