Currently, natural gas prices are characterized by a high degree of volatility. Production interruptions in Israel, Egypt, and Australia have helped to form price spikes. Nevertheless, natural gas prices are still far from their highs of last year. Much depends on the temperatures this winter: if they are lower than expected, gas storage will empty faster than Europe would like. This is the short-term picture, however.

In the medium term it is important to watch the development of the global LNG market (mainly liquefied natural gas for shipping transport). Here, a picture is emerging that should give us pause: the growing competition between European and Asian buyers.

Global LNG price (Asia) has been rising over the past few months Source: St. Louis FED; FRED

China’s natural gas demand is rising While natural gas consumption in Europe fell by 10% in the first five months of this year, on the one hand due to milder temperatures and lower demand in private households, and on the other hand due to economic slowdown and therefore lower demand in commercial businesses, demand in Asia remained largely unchanged.

However, natural gas demand in China rose by 6% in the first quarter, due to increased economic activity following the lifting of COVID-19 prevention measures as well as drought periods, which caused a 23% decrease in hydropower production compared to the previous year.

However, despite China’s recovery being weaker than many market watchers expected, the country’s natural gas consumption is still expected to rise by 6% this year, matching the increase recorded in the first quarter.

According to the International Energy Agency (IEA), the increase in demand is expected to continue until 2024, increasing by a further 7% compared to the previous year due to higher economic growth.

Securing a stable LNG supply could be difficult No wonder then that China’s LNG imports increased by 10%, or 4.5 billion m3, in the same period. For the year 2023 as a whole, the IEA forecasts an increase in China’s LNG imports of almost 15%.

The increase in imports is likely to be supported by a number of new liquefaction terminals to be put into operation by the end of 2023, which will increase China’s current capacity of 140 billion m3 per year by 20 billion m3 per year.

While China is also buying more from Russia, the US remains China’s biggest supplier of LNG. In order to secure an LNG supply and protect itself from volatile spot prices, a number of Chinese companies have now signed long-term supply contracts with US companies. For example, in October, ENN signed a 20-year supply contract with Cheniere for 1.8 million tons per year, or China Gas Holdings with Venture Global for 2 million tons of LNG per year, also for 20 years.

However, long-term contracts are something that European suppliers have been struggling with so far. After all, Europe is aiming for carbon neutrality.

This could ultimately backfire on Europe with increasing competition from China in the medium term… because energy is needed for the energy transition as well. And infrastructure stocks of LNG.