In a departure from my typical data driven analysis, I’d like to talk about a fairly exciting wild card for the upcoming winter, La Niña. The La Niña and El Niño weather pattern have exerted their influence on key demand epicenters over the past several years and it has become foolish to ignore them.
First, let’s start with the fact that the winter of 2018/19 and 2019/20 were both El Niño years.
This brings with it established weather patterns, one of which impacts the demand epicenter of SE and E Asia.
Above we see that this weather pattern brings warmer winters in the key demand epicenters of Japan and S. Korea. Additionally, we see the warmer weather dominating SE. Asia.
However, the La Niña has the opposite impact on some key regions, specifically S. Korea and Japan. Additionally, we see a return to normal winter temperatures in other key Asian regions.
A precursor of La Niña is an active hurricane season. La Niña reduces wind shear—the change in winds between the surface and the upper levels of the atmosphere—allowing hurricanes to grow. The 2020 Atlantic hurricane season has been hyperactive with 25 named storms, including nine hurricanes, spinning across much of the Atlantic basin. This suggests, with high probability, that a La Niña event may be unfolding.
As noted earlier the last two winters have been dominated by El Niño weather patterns which in turn decimated wintertime demand for natural gas. However, the winter of 2017/18 was the opposite story. A chilling winter in Asia drew down inventories and spiked demand for LNG imports, at one point leaving zero vessels available in the spot market.
That 2017/18 winter was our last La Niña weather event. It also led to a remarkably busy 2018/19 stockpiling run prior to that winter, as buyers remembered the high prices and scarcity from the year before.
This isn’t our only short-term factor to potentially provide some support to the market.
S. Korea has shut down 6 nuclear facilities in the wake of Typhoons which caused significant damage. It’s also noteworthy that as the extent of damage became apparent weekly LNG loadings heading to S. Korea spiked, moving from just 3 the week before the storm to 12, 14, and 8 over the past three weeks, respectively.
Rising Asian natural gas prices are signaling a demand return, and China’s return to pre-pandemic normalization is now turning into a modest growth story.
Cargo cancellations for US LNG have all but ceased. This is no small victory as Natural Gas Intel reports 175 U.S. cancellations brought on by C19. September’s U.S. liquefied natural gas exports were on track to increase for a second month in a row and United States liquefaction is expected to resume full operations by November, according to Wood Mackenzie research director Ben Chu. This would bring back a significant long haul for wintertime.
But we must balance this against the ongoing absence of a meaningful arbitrage trade (as prices are expected to remain low and natural gas stockpiles high unless we see a strong La Niña), increasing volumes out of the Power of Siberia pipeline, and an ongoing global economic impact – even for the nations experiencing the swiftest of recoveries.
So, while this latest bounce is LNG shipping rates is welcome, the fundamentals remain mixed. In the short-run our best hope is for an acute La Niña to inspire a drawdown in natural gas inventories, increase LNG cargoes, raise Asian landed prices, and consequently usher in a return of the arbitrage trade (if only temporarily). This would go a long way in rebalancing stockpiles and consequently trade flows in this highly seasonal segment.