It’s been a wild year for commodity markets, marked by despair last spring as the world ground to a halt and followed more recently by exuberance. Nowhere has the bullish feeling been more evident than the usually staid market for liquefied natural gas: February futures for Asian gas hit nearly $20 per million British thermal units last week according to data from Refinitiv. As recently as mid-December, they were only trading around $8 per MMBtu.
Unfortunately for gas producers, today’s prices aren’t sustainable and the longer-term supply picture is bearish. Supply stoppages combined with the coldest winter in Asia in decades are a perfect market for those gas producers who still have capacity to supply spot shipments—including U.S. firms like Cheniere. But futures are already pricing in warmer weather a few months out: the April contract is currently trading around $7 per MMBtu.
Further out, Chinese demand is still the swing factor—as it is for most industrial commodities. Here the news is bullish, but perhaps less so than some LNG vendors might hope. Chinese demand continues to expand robustly, and China continues to consume far more gas than it produces. The bad news is that the growth of that supply gap has slowed noticeably in recent years.
New policies introduced in 2018 and 2019—including a 30% resource tax cut for shale gas and a subsidy pegged to how fast drillers increase output of shale gas and other forms of so-called unconventional gas—have sparked a sharp rise in investment. Chinese oil and gas exploration and development spending rose 25.5% in 2019, according to S&P Global. Natural gas production in 2019 rose faster than consumption for the first time since 2015, improving by 10%.
More recently, production growth in the first 11 months of 2020 was also about 9% compared with a year earlier. Annual output growth only averaged 6.7% from 2011 to 2018. And new pipeline capacity for gas from Russia is also poised to come online, which could boost pipeline gas imports that have mostly been flattish in recent years.