Commodities 2023: Asian LNG markets to brace for more uncertainty, macro risks

Asian LNG markets will grapple with another year of uncertainty in 2023 as both supply and demand fundamentals are impacted by a range of macroeconomic, geopolitical and weather-related factors, according to economists, analysts and traders.

At the macro level, rising interest rates and efforts by central banks to control inflation will directly impact economic growth and energy demand in most economies, including electricity consumption and natural gas demand. Foreign currency reserves and the strength of the dollar will be overarching concerns for the LNG imports of most Asian economies, even as governments fight to stave off a looming recession.

S&P Global Ratings expects global GDP growth of 2.2% in 2023 compared with 3.4% in 2022, followed by a rebound of 3.1% in 2024.

"2023 will be a revelatory year. We will learn how much monetary tightening is needed to curb inflation, how deep any recession will be, and the early contours of the post COVID-economy. We suspect the post-COVID world will differ from the pre-COVID world across several dimensions," Paul F Gruenwald, Global Chief Economist at S&P Global Ratings, wrote about the outlook for 2023.

China's dampened economic activity was one of the key factors capping spot LNG prices in 2022.

"All eyes will be on China's pace of recovery as it lifts its restrictive COVID measures. We are cautiously optimistic that demand recovery will materialize in the second quarter of 2023 as the wave of inflections slows. However, high volatile spot LNG prices and a weak global economy will still dampen China's appetite for LNG," said Zhi Xin Chong, Director, Gas, Power, and Climate Solutions at S&P Global Commodity Insights.

The Platts JKM has averaged $34.002/MMBtu to date in 2022 compared with $15.034/MMBtu in 2021.

"JKM prices are forecast to average $23.0/MMBtu in summer 2023 and $27.40/MMBtu across the whole year," said James Taverner, Research and Analysis Senior Director, Gas Power & Climate Solutions at S&P Global.

Commodity analysts at Citi Research are more bullish on LNG prices and forecast the JKM to average $36/MMBtu in 2023 in their base case, $24/MMBtu in their bear case and $60/MMBtu in their bull case, citing the supply shortfall in Europe that will lead it to keep bidding LNG away from Asia, with JKM prices lower than TTF.

S&P Global's Chong said that 2023 will be the first time Europe will have to contend with minimal Russian supply for the full calendar year.

"Hence, the ability to meet demand and still refill storage will be critical. We expect the situation to continue to remain tight and demand restriction will be necessary to balance the market," he added.

LNG outlook for 2023

Regional gas inventories post winter and the impact of sanctions and price caps on Russian LNG supply to Asia will be things to watch in the near term.

However, in 2023 the true scale of the impact of high LNG prices on the natural gas sector will become clearer -- in the form of decision making around Asia's LNG supply and regasification projects, fuel switching, gas market reforms and liberalization, and long-term contracts.

Market participants expect stalled upstream investments by national oil companies in India, China and Southeast Asia, including Petronas, PTTEP and Pertamina, in gas projects to move ahead. Meanwhile, demand-side investments in regasification will grapple with long-term gas supply issues, such as countries planning to become new LNG importers -- Philippines, Vietnam and Sri Lanka -- or those expanding current capacity like India and China.

India's LNG imports are expected to decline slightly in 2023 from 2022 levels due to reduced term deliveries under a contract impacted by Russian sanctions, but the share of spot LNG is expected to increase if spot prices average $23/MMBtu in summer 2023, said Ayush Agarwal, LNG analyst at S&P Global.

"For markets that have yet to import LNG, the ability to secure LNG cargoes at affordable levels are dim. Hence, we expect to see numerous delays to the commissioning of regasification terminals as FSRUs are chartered out in the interim," Chong said.

He said the LNG industry has responded to the energy crisis with innovations like mid-scale liquefaction capacity that can be quickly deployed, and the success of such floating liquefaction plants in 2023 will add another dimension to reduce the long lead times of LNG projects and augment global supply.

Governments intervening in energy markets to reduce the price impact on end-consumers is a growing trend that will accelerate in 2023, with long-term impact on downstream demand.

"We expect a lot more contention between governments and gas suppliers that could lead to greater uncertainty for businesses and impact long-term investments on LNG. Coupled with rising interest rates, increased cost and a potential slowdown in the global economy, the outlook for fresh investment on LNG facilities is fraught with even more uncertainty," Chong added.

The Bank of America noted an uptick in global oil and gas capex investment of $70 billion in 2022 to just over $400 billion. "Yet it is also important to consider that the last year oil averaged more than $100/b, in 2014, oil & gas capex totaled $761 billion," the bank said in a note to clients in December.