The global gas market, which has been reeling from the sudden loss of 20% of daily LNG supply, is poised to tighten even further in the coming months as higher-than-expected summer temperatures and the El Niño weather pattern are expected to raise gas demand in Asia.
Asian and European gas prices could rally even higher if the Strait of Hormuz remains inaccessible to most LNG tankers this summer, while Asia struggles to meet cooling demand and Europe looks to refill gas storage sites that have depleted to multi-year lows at the end of the 2025/2026 winter.
Shock Supply Shortage
LNG buyers have been scrambling for supply after the de facto closure of the Strait of Hormuz trapped about 20% of daily global LNG flows, those previously shipping out of Qatar and the UAE.
In addition, Iranian drone and missile strikes on energy infrastructure in the region have damaged Qatar’s key LNG liquefaction complex, Ras Laffan, the world’s single largest such facility. Due to the attacks, QatarEnergy has been forced to declare force majeure for up to five years on some long-term LNG contracts and has advised that full capacity could take up to five years to restore following extensive damage from the strikes.
Qatar, the world’s second-largest LNG exporter after the U.S., halted LNG processing as early as the beginning of March. It is struggling to ship cargoes stranded for months in the Persian Gulf, too.
Earlier this week, QatarEnergy extended the force majeure on LNG cargo deliveries to Italian energy group Edison until at least the middle of August.
The shock supply loss due to the Middle East conflict came in the so-called shoulder season, when demand for heating is relatively low in the spring before the summer heat boosts electricity demand for cooling.
However, Europe needs a lot of LNG to replenish storage sites, where gas stocks have crashed below the five-year average at the end of last winter.
Asian buyers of LNG managed the initial shock by price-sensitive customers withdrawing from the spot market and by many countries boosting coal-fired power generation to replace the loss of gas supply. Demand destruction has played an important role in offsetting part of the supply loss.
Hot Summer for Gas Prices
But the coming summer, with forecasts of hotter-than-usual weather and heatwaves, could ignite a fresh rally in gas prices and a fierce competition between Asia and Europe for the now-reduced global LNG supply.
Current weather forecasts point to higher average temperatures in Asia, including in the top LNG importers China and Japan.
In addition, the El Niño weather pattern is expected to raise sea surface temperatures in the equatorial Pacific, which could lead to drier weather in parts of China and hurt hydropower generation in north China. If this pans out, China could see weaker hydropower generation, which will need to be offset by the burning of additional coal and gas.
Europe is in an even more precarious position, as it is currently losing the competition for spot supply to Asia, with Asian prices commanding a large enough premium to incentivize spot cargoes to turn away from Europe and opt for Asia instead.
“It’s a tight gas market in Europe,” Helle Ostergaard Kristiansen, senior vice president for gas and power at Norway’s energy major and top European gas supplier, Equinor, told Bloomberg this week.
“There’s simply a lack of physical gas and it is challenging to fill up the gas storage to an acceptable level for next winter,” Kristiansen said.
“And for every day this conflict continues, it becomes more and more critical.”
Signs have started to emerge that China’s LNG purchasing activity is rebounding from the eight-year lows in March and April. If summer heatwaves and scarce rainfall further raise demand for fossil fuel power generation, China may further boost its LNG imports.
Structural Change in LNG Market
The loss of LNG supply from the Middle East and the uncertainty about when and how much of the volumes would return to the market will keep gas prices for the summer and the next winter elevated and well above the levels from before the Iran war.
As a whole, the LNG market faces a prolonged disruption and a structural change, according to analysts at Wood Mackenzie.
Moreover, LNG charter rates have strengthened in recent weeks as traders seek to preserve trading optionality in anticipation of stronger Asian demand, Vortexa’s analysts wrote in a note earlier this week.
“Asia, which is the destination for over 80% of Qatari and UAE LNG exports, is ramping up purchases of flexible cargoes from the Atlantic basin to backfill the supply shortfall from the Middle East Gulf,” the analysts said.
“This comes amid an unseasonally warm spring and forecasts of above-average summer temperatures in Asia, with Europe’s slower pace of gas storage injections and seasonal decline in post-winter demand helping to rebalance the market.”
By Tsvetana Paraskova for Oilprice.com
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