LNG futures are experiencing a demand recovery trend

Global LNG spot prices have jumped in recent weeks supported by supply disruptions in key shipping lanes and in major gas producing regions. The Strait of Hormuz is one of the world's most important energy shipping lanes, accounting for almost one fifth of the world's total LNG shipments. Many of the major gas exporting countries in the Middle East (e.g. Qatar, UAE) have also experienced multiple export interruptions due to regional conflicts. The disruptions have resulted in a major shortfall in global LNG supply and a sharp fall in international LNG trade volumes in the short-term.

According to data from energy giant Shell, the global LNG market lost around 360 million tons of supply during the conflict period, creating a huge supply gap that directly pushed market prices sharply higher. The price increase in the spot market has been extremely dramatic. Before the conflict broke out, Asian LNG spot prices stood at about $10 per million British thermal units. Supply disruptions sent the price soaring to nearly $30 per million British thermal units, nearly tripling in value. In the futures market, short-term near-month contracts were the first to spike sharply. Large amounts of trading funds rushed into the market to price in the severe supply shortage risk, pushing short-term LNG futures prices to soaring levels.

This period of sky-high LNG prices has completely reshaped gas consumption patterns across Asia. In normal market conditions, natural gas is widely used for industrial manufacturing, power generation and household daily use in most Asian countries. However, after the drastic price hike, LNG lost its cost advantage. Against a backdrop of many industries and regions cutting their gas usage, LNG demand overall was falling fast, and at its lowest levels in years, across a range of Asia-Pacific economies. Consequently, long-dated far-month LNG futures contracts came under heavy selling pressure and fell back as the market feared that weak demand will impact prices in the future.

Large Asian LNG buyers have responded swiftly to the disruption of Middle East gas supplies and strong spot prices by changing their purchasing behavior. China and India, Asia's two largest LNG importers, have been active in seeking to diversify their supplies. Major energy companies, such as India's GAIL and China's CNPC, have looked around the world for alternative sources of gas. These companies have secured a number of medium and long-term LNG supply contracts from other producing regions instead of relying on the sometimes volatile spot market. This strategic shift helps them to effectively avoid the risk of soaring spot prices, and to stabilize their energy supply security.

These proactive procurement adjustments have greatly eased short-term domestic supply pressure. India's GAIL revealed that the country's domestic natural gas supply has now recovered to 90% to 95% of normal levels, and the previous supply shortage gap has narrowed. Markets in China, India and Pakistan are highly sensitive to LNG price fluctuations. Pakistani LNG companies also made it clear that once gas prices fall back to a reasonable and affordable range, domestic market demand will bounce back quickly.

In addition to easing geopolitical tensions that caused supply disruptions, the global LNG market is also welcoming new production capacity, which will further balance supply and demand. Industry forecasts show that between now and the next four to five years, 150 to 200 million tons of new LNG production capacity will be put into operation worldwide. These new gas supplies come from diverse regions including the United States, Mozambique and Australia, breaking the world's long-term heavy reliance on Middle Eastern LNG and greatly improving the stability of global energy supply.

Global energy giant ExxonMobil holds an optimistic view on the long-term development of the LNG industry. The company is also actively investing in LNG production projects in several countries to build a more diversified global production network. World LNG demand is projected to grow steadily through 2050. In particular, China's mature and complete LNG receiving and terminal infrastructure along its eastern coast provides solid support for continuous growth in long-term gas demand. With massive new LNG capacity entering the market, the current tight supply situation will ease gradually, and overly high market prices will eventually fall back to a healthy and reasonable level.