Asia holds the key to balancing global LNG market demand response

Until recently, Asia was the premium market for LNG. However, continuously evolving global dynamics have precipitated dramatic changes. Asia is now the new swing market.

Russia’s invasion of Ukraine has caused a seismic shift in the global gas market. Europe’s efforts to shift away from Russian gas have left the region searching for ways to plug the gap. As a result, demand for LNG in Europe has soared and turned the global market on its head.

Traditionally Europe would provide balance by bringing in more Russian pipeline gas when global LNG demand exceeds supply but in today’s world, with limited ability to flex pipeline imports, Europe is competing for LNG.

Trade flows have shifted radically, with Europe now effectively pulling supply away from Asia. This increased competition, soaring LNG spot prices and Covid lockdowns have caused Asian LNG imports to fall by 7% so far this year, with most severe drops in China (-20%), India (-18%), Pakistan (-14%) and Bangladesh (-13%).

As winter approaches and amid on-going uncertainty over Russian gas flows to Europe, risk to Asian LNG demand remains acute. Europe is hungry for LNG so further demand response from Asia is almost certain – this year and through the first half of this decade.

Asian buyers have been at the forefront of high spot prices and despite affordability concerns have continued to spot buy this year. Spending on imports has already skyrocketed in 2022 as governments seek to ensure supply security and, in some case, avoid critical ‘light on-lights off’ decisions.

But Asia is not homogeneous. Uncontracted spot demand is typically most at risk for demand destruction, as are consumers with weaker purchasing power. Buyers in legacy markets purchase most of their LNG on long-term contracts, typically indexed to oil. This helps to insulate markets and buyers from high LNG spot prices.

Demand response is a complex analysis with drivers unique to each market. When assessing demand response in Asia so far this year though, two key determinants stand out: the level of LNG spot exposure and availability of alternative fuels, including other non-LNG gas supplies.

High spot exposure and high availability of alternative fuels increases likelihood of demand response. This characterises markets like China and India which have seen largest reductions to date as consumers switch to coal and fuel oil in power and non-power sectors. Bangladesh, Pakistan, and Thailand are also at the high-risk end of the scale. With few fuel switching options, however these buyers must continue buying to avoid curtailments and blackouts.

At the other extreme are markets with low spot exposure and limited fuel switching alternatives, like Singapore, Japan, and South Korea. These markets are slower to respond, insulated by their contract position and strong purchasing power. If market conditions persist and further tighten though, there is potential for these markets, particularly in Northeast Asia, to flex demand as well.

Sector level impacts vary market-to-market with power and industrial sectors showing greater flexibility than residential and commercial sectors. This limits the direct impact of gas curtailments on a country’s residents and targets the sectors with greater fuel switching flexibility.

As the crisis is prolonged risks evolve. Some sectors further flex while others reach their limits. High priced spot buying may not be economically sustainable for an extended period in many emerging Asian markets, while others may be forced to react later.

As prices soften post-2026, many markets cutting their LNG demand today are expected to rebound. Scale and pace of recovery is highly dependent on price levels and government policies towards coal. But the severity of the current crisis raises bigger uncertainties and perhaps risk of permanent scarring in the region.