Could Weather Anomalies Prevent a Heating Cost Surge? "El Nino Holds Down LNG Prices" [Weekend Money]

Prolonged Hormuz Blockade Disrupts LNG Supply

"Super El Nino to Bring Warmer Temperatures to the Northern Hemisphere"

While the blockade of the Strait of Hormuz has continued to disrupt the supply of liquefied natural gas (LNG), there is an outlook that this year’s strong El Nino phenomenon (a rise in the sea surface temperature of the eastern Pacific Ocean) will limit upward pressure on prices.

According to Daishin Securities on June 7, analyst Choi Jin-young recently stated, “Although the blockade of the strait has lasted longer than initially expected and the summer cooling season has arrived, the price increase is being dampened by the El Nino weather anomaly.”

Since the blockade of the Strait of Hormuz, approximately 20% of global LNG exports have been cut off. Unlike crude oil, when there is a supply disruption for natural gas, it is difficult to secure alternative transportation routes. Analyst Choi pointed out, “As gas wells remain idle for an extended period, there is even the possibility of a ‘Water Coning’ phenomenon, which can result in permanent productivity loss. This means that a simple distribution bottleneck is turning into a structural problem.”

In addition, summer cooling demand is also considered a variable. Every year, from May to August, electricity usage surges, resulting in significant seasonal fluctuations in gas consumption and inventories. The recent rebound in the Henry Hub price, the benchmark for U.S. natural gas, since May is interpreted as a result of this increased demand.

Super El Nino Suppresses Winter Heating Demand

However, Analyst Choi believes that the possibility of a sharp increase in gas prices in the short term is limited. This is based on the judgment that El Nino is weakening winter heating demand, thereby suppressing upward pressure on LNG prices. In the natural gas market, winter boiler heating demand has a greater impact on price trends than summer cooling demand. The logic is that if winter temperatures are higher than average, the pace of price increases inevitably slows.

Analyst Choi explained, “Currently, sea surface temperatures off the coast of the eastern Pacific are 1.0°C higher than average, meaning we have already entered El Nino conditions. When El Nino occurs, subtropical jet streams strengthen and block the movement of cold, polar jet streams to the south. As a result, winter temperatures in the Northern Hemisphere become warmer than usual.”

He further emphasized, “Given that winter heating demand, which is more important than summer cooling, is weakening, we cannot take an overly optimistic view of prices in the immediate term. This is why the period of a significant rise in natural gas prices should be postponed until next year.”

Upward Trend Expected After Next Year... AI Power Demand and Weak Gas Field Investment Overlap

QatarEnergy's liquefied natural gas (LNG) production facility in Qatar. Photo by Reuters Yonhap News

The analyst expects the main period of price increases to begin after January next year, when the impact of the super El Nino subsides. With ongoing supply disruptions, increasing electricity demand, and weak investment in gas fields overlapping, upward price pressure could intensify in the mid- to long-term.

Analyst Choi said, “From a supply-demand perspective, the conditions for rising gas prices have already been met. The artificial intelligence (AI) boom is causing an explosive increase in electricity demand, as the number of data centers and extra-high-voltage transmission facilities continues to grow. Meanwhile, global oil and gas majors have refrained from investing in gas field development for seven consecutive years, as they try to avoid criticism amid the carbon neutrality trend.”

He added, “Even fossil fuels, which are responsible for 76% of the world’s energy, are now facing instability. I maintain an optimistic outlook for the natural gas market through next year.”

This content was produced with the assistance of AI translation services.