1. Continuous Restructuring of the European Natural Gas Market Supply Structure

In 2022, under the influence of the Russia-Ukraine conflict, there were profound adjustments in the international regional situation and the global economic landscape. Global energy markets experienced increased volatility, leading to tight natural gas supply and price fluctuations reaching historic highs. In an effort to reduce dependence on Russian pipeline gas, Europe implemented various measures to curb demand and initiated a global rush for LNG resources. This led to an exacerbation of regional structural supply-demand imbalances and significant fluctuations in international natural gas prices. The key to whether the global LNG market can achieve rebalancing in 2023 lies in the supply-demand situation in the European market.

Overall, the tightness of the global LNG market in 2023 is expected to ease compared to 2022, but it will remain relatively tight. Further reductions in Russia's supply of pipeline gas to Europe and persistently high natural gas prices will present significant challenges to the global natural gas supply-demand balance. Europe will continue to implement measures to reduce natural gas demand while increasing pipeline gas imports and LNG imports from other countries to compensate for the decline in Russian pipeline gas supply. Asian LNG demand is expected to experience some recovery, but overall it will remain constrained by high gas prices, with steady growth in the utilization of alternative energy sources. The U.S. market will remain relatively balanced in supply and demand, as planned LNG liquefaction projects come online, further increasing exports.

Regionally, the European natural gas market is expected to tighten further in 2023. The supply pattern will continue to undergo restructuring, and Europe will maintain a relatively high degree of dependence on LNG imports, exerting significant pressure on the global LNG supply-demand balance. From the demand perspective, driven by pressures such as high gas prices, energy diversification away from Russia, and economic growth slowdown, Europe will continue to reduce natural gas demand through energy conservation measures in industrial and residential sectors, as well as increasing nuclear and coal-fired power generation. It is expected that European natural gas demand for the whole year will see a further slight decrease compared to 2022. On the supply side, LNG is the key to supporting European natural gas demand. To compensate for the decrease in Russian pipeline gas supply, Europe will continue to increase the use of alternative energy sources, such as coal, nuclear, and renewable energy. Additionally, there will be an increase in pipeline gas imports from countries like Azerbaijan, Algeria, Libya, and an increase in gas field production in Norway and the Netherlands within the European Union region.

Apart from the mentioned supply increases, Europe will still require a significant volume of LNG imports to meet its demand. In 2022, European LNG imports reached nearly 128 million tons, an increase of 47.7 million tons compared to 2021, representing a 60% year-on-year growth. The majority of the increase came from France, the UK, Spain, Belgium, Norway, Italy, and Poland, among others. High LNG import volumes ensured that European underground gas storage facilities continued to replenish and successfully navigated through the heating season.

It is expected that in 2023, European LNG imports will moderately increase after the strong growth in 2022, with an increment lower than in 2022 but higher than in 2021, estimated to be between 6% and 8%, equivalent to 6 to 8 million tons. Importantly, LNG imports by countries like the United Kingdom, France, and Spain will significantly decrease. Furthermore, Europe will add nearly 78 billion cubic meters of LNG receiving capacity, which will help maintain its high LNG imports.

2. Asia as the Primary Driver of Global LNG Demand Growth

In 2023, Asia will once again become the primary driver of global natural gas demand growth. At the same time, the recovery in demand will continue to pose risks due to high natural gas costs.

Asian LNG demand will experience year-on-year growth, driven by China and emerging markets. Since 2022, LNG import demand in major Asian countries and emerging markets has been suppressed by high gas prices, reducing the proportion of spot LNG imports from 72.9% in 2021 to 62%. In 2023, with the influence of economic recovery, improved pandemic situations, and declining spot LNG prices, China's LNG demand is expected to recover significantly. The LNG demand in Japan and South Korea will be somewhat restrained by the recovery of nuclear power, and long-term LNG contracts may largely meet the demand in these countries. Japan's LNG imports are expected to increase moderately in 2023, while South Korea may experience a slight decline.

Meanwhile, LNG demand in emerging Asian markets will continue to grow. Countries like Thailand, the Philippines, Pakistan, and Singapore will witness increased gas demand for power generation. However, due to the price sensitivity of emerging market countries, the growth in LNG demand in these areas may be restricted, as some countries will continue to utilize more cost-competitive energy sources such as coal, fuel oil, and renewable energy as alternatives.

3. U.S. LNG Supply and Demand Fundamentals Set to Ease

In 2023, the fundamentals of U.S. LNG supply and demand are expected to ease, with increased LNG supply. The U.S. LNG market experienced tightening supply and demand conditions and rising price fluctuations in 2022, influenced by tight supply in the Eurasian markets. Since the beginning of 2023, U.S. domestic natural gas production has started to rebound and has already returned to levels exceeding 100 billion cubic feet per day, similar to 2019. Additionally, some field pipeline and expansion projects are expected to come online, further benefiting U.S. natural gas supply. It is projected that in 2023, high commencement rates of LNG liquefaction projects in the U.S. and the start of new projects will support continued growth in LNG supply, increasing supply capacity from 90 million tons in 2022 to 94 million tons.

Looking at the global picture from the demand side, with the growth in LNG demand in Europe and Asia, global LNG demand is expected to continue growing. In 2023, pipeline gas imports from Russia to Europe will further decrease, and the supply system will undergo restructuring, with LNG imports maintaining high levels to compensate for the decline in pipeline gas imports. Moreover, global LNG resources will flow into Europe at an accelerated rate, and there will still be significant competition for Eurasian LNG resources.

Regarding the supply side, global LNG capacity additions are limited. In 2023, approximately 15.5 million tons of new LNG liquefaction capacity is planned globally. However, considering factors such as project delays, the actual incremental supply capacity is expected to be about 10 million tons. Currently, countries like the United States and Qatar have reached high levels of liquefaction project commencement rates, with limited room for supply increase. In summary, it is expected that global incremental liquefaction capacity can meet the increase in LNG imports, easing the global tightness in LNG supply.

In terms of prices, since the beginning of 2023, major natural gas market prices worldwide have significantly decreased. However, there is still a risk of price increases in the future. In recent months, factors such as warmer temperatures, favorable storage conditions, reduced European demand, weak Asian demand, increased U.S. production, and diminished geopolitical premiums have led to the downward movement of natural gas prices. Currently, the Henry Hub benchmark natural gas price in the United States has fallen to around $2.5 per million British thermal units (MMBtu), returning to levels similar to the pre-pandemic period. While benchmark European natural gas prices like the TTF and JKM (Japan-Korea Marker) have significantly dropped from previous levels, they still remain well above historical levels for the same periods.

Under the baseline scenario, European natural gas storage will remain at high levels after this winter, and the geopolitical premium risk caused by the Russia-Ukraine conflict will gradually dissipate. As a result, natural gas prices in all three major regions will decrease compared to 2022 but still remain elevated. Of note, Europe may require more than 60% of its LNG demand to be met through spot purchases. This will lead to periodic supply tightness during restocking periods and increased competition for Eurasian LNG spot procurement. Additionally, Europe will continue to pay a premium above Asian prices to attract more LNG spot cargoes.