Why LNG Demand will (almost) always match Supply
One of the most-discussed topics at LNG conferences, and in research papers, blogs, and articles is the outlook for LNG demand. Yet most of the time, the discussions and conclusions are utterly pointless and meaningless. LNG Demand will (almost) always match supply - for simple economic reasons. But that’s not necessarily good news for many market participants.
[This article is not financial or investment advice, but provided for general information purposes only. All information is subject to change and should not be relied upon for any decision making. See Webpage Terms of Use.]
[note - Article originally published on March 4th, 2025 and updated with clarifications on March 17th, 2025.]
Why LNG is different
Demand “almost always” matching supply does not make intuitive sense, and for most commodities it is not true. What makes LNG different? Three factors:
Relative Market Size
Sunk-cost economics
Regas capacity factors
Let’s explore these in a bit more detail.
Relative Market Size
The key aspect here is the relative size of the LNG market compared to the overall Natural Gas market. Global Natural Gas demand in 2024 was somewhere between ~3,900 bcm* and ~4,200 bcm**. Global LNG trade in 2024 was 407 mt*, equivalent to ~553 bcm***. This implies an LNG market share of 13-15%. In other words, for every unit of LNG, the world currently consumes about 6 units of domestically produced or pipeline-delivered Natural Gas. In turn, this means that the demand for Natural Gas does not limit the demand for LNG - at sufficiently low prices, LNG will replace other sources of Natural Gas. This seems to happen right now in Pakistan (“LNG imports force closure of local gas fields”). But it leads to the next question - how price (in-)elastic is LNG supply?
Sunk-cost economics
Sure, much lower prices can stimulate demand, but wouldn’t they also reduce supply? Yes, at some point - but that point is FAR below current market prices.
LNG is a capital-intensive industry, but most of it is spent up-front, with little maintenance Capex required. And Opex is relatively low, usually well under USD 1/MMBtu. Even significant parts of the shipping costs are sunk, at least in the short term, as the current market rut is demonstrating (“LNG shipping rates slump to historic lows - and they’re still falling”). But let’s assume that shipping costs remain a variable cost. On most routes, shipping costs somewhere between USD 1-2.5/MMBtu. Add USD 1/MMBtu for onshore Opex. Feed gas costs obviously fluctuate very widely, for most capacity from below USD 1/MMBtu up to USD 5/MMBtu for US-based projects with current spot prices. Thus the variable cost per cargo with these assumptions is somewhere between USD 3-8.5/MMBtu. But that doesn’t necessarily mean that capacity will be shut in at these levels - contractual conditions often impose direct and indirect deferral and cancellation costs. There has been lots of speculation on the spot prices needed to lead to capacity shut-ins, and most experts see that price range around USD 5/MMBtu delivered cost. (for a deeper evaluation of this topic, highly recommend the interview with Samantha Dart,Head of Natural Gas Research at Goldman Sachs, on the C.O.B. Tuesday podcast). Note though that with the US now being the world’s largest LNG supplier, this threshold very much depends on US domestic (Henry Hub) gas prices. The “Alpha” in tolling price formulas represents (most of) the sunk costs, but the beta (typically 115% of Henry Hub) can often be flexed. This means that we should expect substantial supply reductions from US projects once spot prices drop to about 115% of Henry Hub plus incremental cost of shipping.
Still, this is about one third of the current (February 2025) spot market price for LNG. Lowering the price of any product by two thirds would clearly increase that product’s competitiveness and thus demand massively. Which brings us to the last question - can the market physically handle the potential additional supply?
Regas Capacity Factors
In short, yes - the 407mt of LNG trade in 2024 compared to about 1,000 mtpa of regasification capacity. In other words, LNG trade could increase 2.5-fold before regas capacity is maxed out. And in Asia alone, over 150 mtpa of import capacity increase is expected by 2030*. Why the low capacity factor? Because Regas is one of the cheapest elements in the LNG value chain, yet creates a lot of flexibility and optionality. It thus acts at the same time as an enabler for stable long-term supply and as a “real option” for certain price scenarios.
What does this mean?
Let’s recap - LNG represents less than 15% of the global Natural Gas market, supply is highly price inelastic, and there is plenty of import capacity. Thus as more liquefaction capacity comes online, customers can physically take it, and they will be financially incentivized to substitute other gas supply once prices drop. And they can drop quite far before any material supply gets curtailed meaningfully. And this gets us to the key point - whilst demand will (almost) always match supply, the balancing factor is price - the spot price, to be more precise. Thus without a discussion of associated spot price levels, any “demand forecast” is (almost) completely useless.
But at least it’s easy - demand will match supply - (almost) always!
What does this mean for spot-market based netbacks? They will likely remain as volatile as they have always been - which is easy to forget amid the current market frenzy. For a lookback, see our earlier blog article “Canadian gas to JKM - Buckle Up“.
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