2023 Outlook for Liquefied Natural Gas is Calmer

Last year was a big year for liquefied natural gas. Russia's decision to curtail pipeline gas supplies to Europe sent prices soaring and threatened to push Europe into recession. The panic-induced price spike of 2022 probably won't be repeated this year, but betting on lower prices would also be unwise.

LNG prices have fallen after a milder than expected winter in Europe. Asian LNG spot prices have fallen nearly 67% from the record highs reached in August last year. They currently sit around $23 per million British thermal units (MMBtu), according to Refinitiv, down about 32% since early December—although still more than twice as high as in mid 2021.

The price of supercooled fuel is not likely to drop any further. Europe's transition to clean energy and its efforts to make up for lost Russian supplies will take several years. With China's economy reopening, demand from Asia is expected to stay strong, even though global trade is weakening.

According to S&P Global, LNG imports into the European Union and United Kingdom rose to 39% of total gas imports in 2022, up from 23% in 2021. Although Northwest European storage levels remain comfortable at 82% full, storage sites will need to be refilled in late spring, just as China's rebound is gaining momentum.

The International Energy Agency has estimated that the EU would face a shortfall of 27 billion cubic meters in 2023 if gas deliveries from Russia were to cease and China's demand for LNG were to rebound to 2021 levels. Wood Mackenzie, a research and consulting firm, has said that European prices in 2023 would be lower than in 2022 but would still remain above $25 per MMBtu.

Although China's reopening will likely increase demand for LNG, it is not expected to be the main driver of prices in 2023. Natural gas made up only 8.9% of China's overall energy demand in 2021, and the country has other options available, such as coal power and imported gas from Russia and Central Asia. According to CEIC data, pipeline gas imports into China were 33% higher last year than in 2020, while LNG imports were 5% lower.

China's current policy environment is focused on boosting growth and energy security, which may not be conducive to a significant increase in LNG imports. According to Wood Mackenzie, Beijing's focus on cost control and energy security, as well as record natural gas production in 2022, is limiting coal-to-gas switching across the power and heating sectors in the near term. Citi expects China's LNG imports in 2023 to remain relatively flat, assuming a moderate 5% growth in domestic consumption.

Europeans who are concerned about China's reopening may not need to worry as much about LNG as they think. However, LNG will still be more expensive than it was before the war.