Europe storage gap, Middle East risks and Russian LNG exit may reshape winter flows

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Cindy Yeo:

Hello. Welcome to the Platts Commodities Focus podcast by S&P Global Energy. Today, we are taking a look at the LNG market ahead of the winter season and asking a familiar question, "Where will the marginal cargo go?"

Cindy Yeo:

I'm Cindy Yeo, price reporter with the Asia LNG team. Joining me today are Shermaine Ang, senior manager for Asia LNG, as well as Megan Brown, price reporter with the Atlantic LNG pricing team. Weather uncertainty, geopolitical tensions, and potential supply disruptions could quickly tighten the market and reignite competition for flexible LNG cargoes. So where does each region stand heading into winter and what are the key risks that market participants should be watching? Let's start with Asia. After a quiet stretch, we've seen Asian buyers returning to the sport market over the past few weeks. Shermaine, what's driving that and what's happening on the demand side ahead of winter?

Shermaine Ang:

Thanks, Cindy. Yeah, September was really quiet. Buyers were mostly just sitting on their hands, but the last few weeks have been a different story. We've seen JKM going over $30 since the 19th of October, which we hadn't seen since December 2022. And it just hit over $34 for MMBtu on the 30th of October. So part of that reason of the late return is that the [inaudible 00:01:27] market had encouraged some buyers to defer the procurement, and that's on the expectation that cargoes might be cheaper later. But once prices moved higher and winter supply uncertainty persisted, I think some had to come back into the market. And a lot of that buying also has came from state-backed companies, Chinese NOCs locked in their winter cargoes. And Koreans as well, we've heard picked up about four, five or six cargoes. And we have heard Taiwan also looking for Jan to March supply.

By these prices, plenty of buyers have also gone back to the sidelines. Korea and Taiwan, I think particularly worth watching because of how exposed they are to the Gulf. QatarEnergy has also extended its force majeure again now through the end of December. And that's the eighth extension now for Edison in Italy alone. So depending on how you count it, Gulf LNG exports, currently only at a quarter to maybe 40% of what they were before the war. And Korean's inventories have also been described as relatively healthy. So some of their recent buying looks more supply, security insurance driven than evidence of an outright shortage.

State backed buyers also may still purchase regardless of the price to protect winter supply, while private and more price sensitive buyers are more likely to step back. One other factor is also the weather. So the weather has thrown a curveball recently. Everyone was positioned for warm El Nino weather and now SERA analysts had flagged about 4 million metric tons of downside risk to the fourth quarter demand. But then recent co-snap has hit Northeast Asia and we have seen below freezing temperatures in parts of China and South Korea. And we even saw our first snow in Northern Japan. So obviously this might not last.

Korea's cold is expected to ease. Japan's forecast is also still above average from most of November, so I wouldn't call the whole winter off the back of it. And lastly, Japan's utility stocks are down to about 2.15 million tons, but that's still a touch above average. So far, the colder weather has not really triggered a rush for spot cargo purchases with buyers still leaning on inventories, coal and nuclear instead of chasing spot LNG cargoes. That's why demand can look comfortable even though supply is tight.

Cindy Yeo:

Thank you, Shermaine. That's very insightful. And what about the outlook for the biggest importer in the world, China?

Shermaine Ang:

China is an interesting one. They are currently the weakest spot for demand. China's importers have mostly stepped aside after mid-October when we saw them purchasing a couple of cargoes. Domestic prices are currently still around mid 7,000 rem per ton. I think we have seen the highest in Southern China of 8,000 per ton, but that still works out to be only about $20 per MMBtu. So that's still well below current JKM levels.

Net LNG imports were also down about 12% year-on-year in September. The state back names did still buy. We've heard Sino taking several cargoes for November and December for winter stock building. Storage injections also look quite advanced. Most CNPC and Sinopec sites have reported more than 90% of their annual targets by early October, although China doesn't systematically disclose inventory levels, but China also has more alternatives than imported spot LNG, like domestic gas production, Russian pipeline supply, and strong renewables, hydro and nuclear generation.

All of this give buyers more room to set out a $30 plus JKM market. So I'd call China tight, but balanced rather than short, although a proper cold spell could of course still cause some regional tightness.

Megan, we have heard of players in this region looking to open the US arbitrage window to Asia as European LNG prices have remained firm. How are things looking like in Europe?

Megan Brown:

Thanks, Shermaine. So winter is definitely the peak demand period for Europe. We tend to see not only strong competition globally, but within Europe too, as premium markets such as Germany and the UK will look to procure LNG to meet their domestic consumption needs as well as to serve as a re-gasified gateway to the rest of Europe. But Europe is more exposed heading into this winter than in previous years. So gas storage levels in the EU are just under 75% right now according to the latest data. But at the same time in 2025 and 2024, stores were filled to just under 83% and around 95% respectively. So we are going into the heating season with a smaller buffer this year. That doesn't necessarily mean the market's tight right now, but it does make Europe more sensitive to what happens over the next few months. As you mentioned, as is the case for Asia, same for Europe in that a key variable is weather.

So a mild winter will make the storage position much more manageable, but in a colder scenario, Europe will need to pour significantly more LNG into the region just at the same time that Asian demand may also pick up. So that's where the competition for the marginal cargo becomes really important. Europe will need LNG when the balance tightens, but the question isn't simply whether there are enough cargoes available globally, it's also what price Europe needs to pay to keep those cargoes in the Atlantic basin.

So the risk is not necessarily Europe running short of LNG immediately, but having to pay up to attract those marginal cargoes during the height of winter. And market participants are sort of telling us that December and January is the key time in which this will become most important. So I have a question for Cindy. Based on your conversations with market participants, what's one thing that you think the market may be overlooking right now?

Cindy Yeo:

So one issue that comes up quite infrequently in market discussions is Europe's upcoming ban on long-term Russian LNG imports. While most attention remains focused on winter weather and the Middle East conflict, the Russian LNG phase-out begins on 1st of January 2027, and some market participants are already thinking about how it could reshape trade flows and procurement strategies.

Megan, on this, I wanted to ask whether the European market is becoming too complacent about the Russian LNG phase-out or has buyer behavior been already shifting even before the ban officially takes effect?

Megan Brown:

Yeah, that's a good point. I think for Europe, the timing is really important. As you mentioned, it comes January 1st, 2027, so that's right at a key point in the winter season. And there's kind of two consequences going on at once here. So Europe will need to replace the Russian supply that it had previously been receiving, while at the same time those Russian cargoes still need to find another home. So we're not necessarily talking about LNG disappearing from the global balance. It's more of a question of those volumes being directed elsewhere. And to put this into context, Russian LNG currently makes up around 30% of Europe's long-term LNG contracts. So for Europe, this potentially means greater reliance on flexible Atlantic basin supply, namely US LNG, at precisely the point when winter demand could be the strongest. The key question is therefore whether the market has fully priced in that replacement requirement into Q1, particularly if Europe enters January with depleted storage.

It could also reinforce the importance of the NWE basis because if Europe needs to attract those additional cargoes, Northwest European LNG prices may need to become more competitive relative to JKM in order to keep that a flexible Atlantic basin supply in Europe rather than pulling it towards Asia. But ultimately, the ban doesn't remove Russian LNG from the global market. It changes where those molecules may go, potentially reshuffling the flows between Europe and Asia. It could be quite tricky for those cargoes to find a home in the Atlantic. Egypt won't be able to take them, for example, as their FSRUs are European. And for Turkey, they've positioned themselves as a gateway to the rest of Europe. So any additional Russian molecules are unlikely to find a home there either. However, whilst it is a redirection of flows because of the increasing shipping logistics and voyage times where these Russian cargoes have to go elsewhere, it's likely that Yamal could be utilized yet less.

The increase in shipping demand could also contribute to higher freight rates over Q1. However, that being said, many new vessels are entering the market in 2027, so this could help to offset this. But Cindy, I'm wondering how do you see the Russian LNG ban affecting the Asian market?

Cindy Yeo:

For Asia, interestingly, the impact could actually provide some relief. So if Russian LNG can no longer find a home in Europe, some of those molecules will naturally look towards Asian markets instead. So China is probably the most obvious destination, particularly if Russian cargoes are offered at a discount. So since August of 2025, about 4.6 million metric tons of optic tool LNG volumes have been discharged into China's Bay High terminal. So from an Asian perspective, that could ease some competition for the marginal cargo. You could almost have start two regions moving in opposite directions, Europe needing to attract more replacement supply while parts of Asia potentially gain access to additional Russian volumes. Before we end, are there any other events we should watch out for, Shermaine?

Shermaine Ang:

Sure. A few things I can think of. Firstly, US supply. We recently heard that all three trains that we port tripped offline in late October after a power problem, that's following another outage earlier this month. And we have also heard of a new capacity, like [inaudible 00:10:58] to not producing until 2027. So there's no cushion really if more outages happen in US production plants. Of course, shipping matters too for freight and war risk insurance can materially change which destination makes more economic sense. And arbitrage isn't uniform, right? US cargoes currently particularly difficult to pull into Asia, but on the other hand, West African supply can look more relatively workable. So the origin of the marginal cargo matters and portfolio players will keep redirecting supply as the Europe-Asia economics move.

And then of course we have the Middle East, which is still the biggest swing factor. The talks in Tehran recently didn't produce a deal and there are reports of possible renewed US strikes after the midterms happening on the 3rd of November. And of course, Qatar's forced merger, as I mentioned. So any potential extension of that and add on Europe's low storage, which is what Asia is also competing with, will hit the market with no spare supply.

Looking further out though, I would say we can watch for Q1 2027 contracting activity and also how the annual delivery program discussions go, which are happening around the end of this year, because buyers end up being over-contracted if supply recovers faster than expected next year.

Cindy Yeo:

Thank you very much, Shermaine and Megan, for this very fruitful discussion. It looks like the market is already feeling the pressure heading into winter with prices elevated and plenty of risks that could tighten the balance even further. We will be watching closely to see where that marginal cargo ultimately goes.

Thanks very much, Shermaine and Megan, for joining me in this conversation. And of course, thank you for listening. This Commodities Focus episode was produced by Chandreyee Mukherjee in Gurugram.