As the global gas market grapples with the Strait of Hormuz being all-but closed for nearly three months, traders are fixated on two wildcards: China and the weather.
Summer forecasts are pointing to higher-than-normal temperatures across Asia, while an El Niño weather pattern could make things even hotter. That will boost air-conditioning use and strain power grids when energy prices are already elevated. The key risk is the heat triggers stronger demand in China, the world's No. 1 liquefied natural gas buyer.
The conflict in the Middle East has choked a fifth of global LNG supply, but that hasn't resulted in extreme price spikes seen during previous energy crises. That's mainly down to weaker Chinese imports in March and April, but signs of a rebound in the country's purchases are raising the prospect of fiercer global competition at a time when Europe will need to replenish inventories ahead of winter.
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“The full impact of the Strait of Hormuz closure has not yet been felt because we have been in the soft shoulder season for demand,” said Saul Kavonic, an energy analyst at MST Marquee. “LNG prices could rise a further 50% through August if the Strait remains largely closed.”
LNG flows have already begun shifting toward Asia, where buyers are willing to pay higher prices, reversing a period in which Europe absorbed vast amounts of global supply to offset the loss of Russian pipeline gas.
LNG deliveries to Europe are down more than 10% from a year ago, according to a 30-day moving average of ship-tracking data. And in the last two weeks, a few US shipments headed to Europe have diverted to Asia.
Meteorologists are expecting that El Niño — which warms sea surface temperatures in the equatorial Pacific — will emerge from June to August, and strengthen in subsequent months. That could bring hotter weather, but there's still a lot of uncertainty over how intense it will be.
While El Niño is typically associated with raising average global temperatures, where and when that happens depends on the phase of the phenomenon and other overlapping atmospheric patterns.
In the summer months, El Niño typically suppresses rainfall over India and much of maritime Southeast Asia, while bringing wetter conditions to central and southern China through autumn and winter. By contrast, it can raise the odds of severe drought and heat in northern China.
Forecasts currently point to hotter-than-normal summer temperatures in East Asia. The average in Japan is expected to be around 1.5C (2.7F) above normal, while South Korea and much of China will see smaller anomalies of 0.5C to 1C above average, according to James Caron, director of US and Asia meteorological operations at Atmospheric G2.
In South America, El Niño is slated to spur LNG import demand in Colombia in particular, as drier conditions there will reduce the country's hydropower generation. This would also coincide with heating demand from Argentina over the Southern Hemisphere winter.
From June through August, southern and southwestern China — home to the country's biggest LNG importers — has a high chance of temperatures in the top 20% of historical records, according to outlooks from the European Centre for Medium-Range Weather Forecasts.
One critical factor will be whether China has adequate hydropower output this summer, as that would reduce the need for gas. Southern and eastern China are predicted to see near-normal to wetter conditions, which would generally support hydropower output, while the north may face pockets of dryness, Caron said.
Chinese LNG imports — which slumped in the months after the war began — are recovering as utilities refill storage and replace lost Qatari supply. The 30-day moving average of deliveries to the country are down less than 10% compared with last year's levels, an improvement from minus 30% in late-March.
“China's demand is likely to increase in the coming months following seasonality,” said Maggie Xueting Lin, an energy research strategist at Citigroup Inc. But “industrial demand remains quite weak due to a sluggish real estate sector” and, for now, the “Chinese government has kept the tariffs on US LNG imports,” she said.
Japan, the world's second-largest LNG buyer, is facing a blistering summer, according to local forecasts, which could force it to buy more shipments of the power-plant fuel. The nation's spot electricity prices have jumped over the last few months, and are near the highest level since 2022. Some traders say that Japanese buying, which has increased in previous El Niño years, could move the needle even more than China.
Europe, meanwhile, is poorly positioned from an energy perspective as temperatures warm: Swiss hydro is low and river levels are declining, which could affect nuclear power plants. While Asia has recently been outbidding Europe in LNG markets, that could quickly change and result in sharp price increases.
“It's a tight gas market in Europe,” said Helle Ostergaard Kristiansen, senior vice president for gas and power at Equinor ASA. “There's simply a lack of physical gas and it is challenging to fill up the gas storage to an acceptable level for next winter. And for every day this conflict continues, it becomes more and more critical.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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