What is the Impact of Increased Asian Energy Demand on Europe's Plan to Avoid Winter’s Cold?

Asia's growing energy demand threatens to deprive Europe of warmth next winter, putting Europe in a major crisis, especially as it tries to reduce dependence on Russian fuels and secure enough natural gas and coal from sources of supply away from Russia.

Attempts to provide warmth to their economies and populations depend on the weather situation over the coming winter in three countries on the other side of the world: China, Japan, and South Korea, which share the peak demand for heating with Europe.

Although it is still too early for meteorologists to make accurate forecasts for winter weather patterns, any forecast of a sharp drop in temperatures in the three Asian countries could spark stiffer competition for fuel shipments.

 

Asian Winter

The peak heating demand season occurs throughout the winter in all of the Asian nations, which are among the major importers of liquefied natural gas and seaborne coal in the world.

Although it is still too early to anticipate winter weather patterns with precision, any forecast for sharp drops in temperature in the three countries could lead to more heated competition for cargo.

The pressure is set to get tighter across Europe. Next week, the European Commission will fully ban Russian coal, and Gazprom PJSC has reduced pipeline gas deliveries to Europe. Russia has historically been the largest gas supplier to the European Union, meeting around 40% of demand.

According to BloombergNEF analyst Abhishek Rohatgi, if Russian supplies to Europe remain low, a colder-than-average winter could result in price increases since acquiring extra spot cargoes will be exceedingly challenging. The weather can be unpredictable, particularly for Japan and Korea.

European countries are rushing to get ready for the winter by reducing their gas usage, importing more LNG to fill storage caverns, and restarting idle coal power units.

Asia has so far provided them with the following assistance: After increasing domestic output, China reduced its imports of coal and LNG, and it is also experiencing an economic slowdown as a result of viral lockdowns.

 

Blackouts and Prices

More energy from renewable sources has been produced in all three Asian nations. While China used less coal over the first half of the year as clean sources like hydropower grew, Japan and South Korea set records for solar power in May.

However, the additional purchases from Europe have driven spot LNG and coal prices to all-time highs this year. Developing nations such as Bangladesh and Pakistan are already suffering from daily blackouts because they cannot afford to pay for cargoes that could keep the lights on.

As winter approaches, the competition can become even more intense. According to BloombergNEF, Japan and South Korea may increase their purchases of spot LNG if they begin accumulating gas reserves.

The two countries will need to increase their purchases of the fuel for power plants before the end of the year because Japan's coal reserves are also incredibly low.

BloombergNEF analyst Ali Asghar said that the majority of coal cargoes, particularly those with a high energy content that Japan and Korea consume, are contracted out due to high demand, and Japan and Korea will be competing with Europe for the majority of spot cargoes.

"Should there be a very cold winter, Japan and South Korea will likely need additional spot cargoes, in which case they can probably compete with European buyers," said Xizhou Zhou, head of global power and renewables at IHS Markit. "China, on the other hand, would likely resort to more domestic coal."

 

Collateral Damage

With a power storage breakdown, rising demand in Asia, and rising costs, the US supply of liquefied natural gas (LNG) is being constrained, posing a threat to Europe's plan to rely heavily on LNG imports to get through a winter of poor Russian gas supply.

Due to the region's desire to end its reliance on Russian supplies as a result of its conflict with Ukraine, it now heavily relies on LNG imports, primarily from the United States, to reach its November gas storage filling goals of 80%.

As supplies through the Nord Stream 1 pipeline declines, countries are preparing for a potential total cutoff from Russian gas with backup plans including boosting coal-fired power output and LNG.

Damage from a fire that occurred earlier this month at Freeport LNG's Texas plant, a significant supplier to European customers, will prevent the facility from operating partially through the end of the year.

It is anticipated that the Freeport outage will result in a loss of about 4-5 million tons this year, increasing competition for the fuel source. Freeport had been shipping 70% of its shipments to Europe.

This year, Europe has imported a record amount of LNG—60% more than it did a year ago—helping to keep European gas benchmark rates at the Dutch TTF hub higher than the price of Asian LNG benchmark Japan Korea Market (JKM).

Tamir Druz, managing director at Capra Energy, said in press statements that Asia and Europe are becoming increasingly out of balance, with European stocks increasing at the expense of Asian inventories.

He added that he predicts that the second half of 2022 will witness a decrease in LNG imports for the EU, Turkey, and the UK of roughly 16%, or 10 million tons, compared to the first half.

 

Unstable Market

Asian buyers are returning to the spot LNG market to buy, sending JKM prices 60% higher to nearly $37 per million British thermal units (MMBtu).

Kaushal Ramesh, senior LNG analyst at Rystad Energy, sees that the gap between the LNG futures and spot prices is expected to narrow dramatically to roughly $0.60/MMBtu by January 2023 on the TTF and JKM forward curves, indicating that Asia will once again compete with Europe for cargo.

In press statements, he added that as charters worry about running out of shipping capacity in the busy months, Asia is already preparing for winter by reserving LNG ships on multi-month charters.

Japan also expects its power market to be extremely tight this winter in the event of cold temperatures and unforeseen outages at power plants, he said, which could raise LNG demand.

The concern is growing about Europe's ability to achieve its ambition to raise gas storage levels from 55% currently to a target of 80% before the key winter heating season.

"The current storage levels in Europe should suffice through November in the event of an immediate halt in Russian flows, but that means a severe winter crunch that could send TTF prices rocketing," Rystad Energy's Ramesh said.

Analysts expect European gas storage to be at 67% if Nord Stream continues to run at around 40% capacity by November 1 and at 60% if it halts completely, both below the 5-year average.

"A <70% start to winter will put Europe at extreme risk of shortages, potential outages, and rationing in the event of an unseasonably cold or long winter," Druz said.