The price gap between Asian and European natural gas benchmarks has widened dramatically. This summer's El Niño phenomenon is placing extreme pressure on an already severely strained global liquefied natural gas (LNG) market.

The blockade of the Strait of Hormuz over the past three months has cut off nearly 20% of global LNG supply. The World Meteorological Organization (WMO) forecasts an El Niño event to develop by mid-2026, with above-normal land surface temperatures dominating globally from May to July. As a core consumption region for LNG, the surge in electricity demand driven by intense summer heat is expected to significantly boost restocking demand in Asian economies.

Amidst these supply-demand imbalance expectations, the regional price structure of the global natural gas market has shifted notably. Previously, the Japan Korea Marker (JKM), Asia's benchmark price, and the Dutch Title Transfer Facility (TTF) price, Europe's benchmark, often moved in close tandem. That premium has now been decisively broken.

Data from Intercontinental Exchange (ICE) shows the July delivery JKM futures price has surged to $18.810 per million British thermal units (MMBtu), while the concurrent TTF price is $16.639/MMBtu. The spread between the two has widened sharply from $1.59 in April to $2.171. As this arbitrage window expands, global LNG shipping capacity is responding, with tanker owners rerouting cargoes eastward.

"The trans-ocean bidding war between European and Asian economies has begun," stated Roukaya Ibrahim, Chief Commodity Strategist at BCA Research. She noted that due to the higher premiums offered by Asian buyers, U.S. LNG cargoes originally destined for Atlantic ports in Europe, and even some refined crude oil exports from the U.S., are now being diverted to Asia.

El Niño Applies Extreme Pressure Extreme weather is becoming the most significant uncertainty factor driving up demand. The WMO indicates that El Niño events influence temperature and rainfall patterns across different regions and typically have a warming effect on global climate. Under its influence, 2024 was the hottest year on record.

James Caron, Head of U.S. and Asian Meteorology at Atmospheric G2, stated that current forecasts clearly point to summer temperatures in East Asia being higher than normal. Japan's average temperature is expected to be about 1.5 degrees Celsius above normal, while South Korea's anomaly is projected between 0.5 and 1 degree Celsius.

Anticipating tight supply, data from the Japanese Electricity Market Data Hub and the Korea Power Exchange (KPX) show Japan's gas-fired power generation fell to a two-year low in April, while South Korea's dropped to a six-month low. Concurrently, Japan's coal-fired power generation surged 11.1% in April, the fastest pace in at least a year, while gas-fired generation plummeted 12.9% to 16,447 gigawatt-hours (GWh). South Korea's coal-fired power generation rose sharply by 39.7% year-on-year in April to 10,733 GWh, the largest increase since August 2019, while gas-fired generation fell 6.4%.

"Japan's increased coal-fired generation in April replaced approximately four LNG cargoes, which is close to half of the annual import reduction the government originally expected to achieve by increasing coal use," said Xu Fei, Senior Gas Analyst at ICIS. "This helped Japan maintain its LNG inventories at the end of April near the five-year average."

Demand-side pressure is not limited to Asia. Affected by extreme weather, Switzerland is currently experiencing low water levels and continuously declining river flows, which could directly impact the cooling and operation of traditional nuclear power plants in Europe, adding more pressure to the continent's power market. In South America, El Niño is also expected to bring drier weather to Colombia, causing a sharp drop in the country's hydropower generation and stimulating its LNG import demand. This coincides with peak heating demand during the Southern Hemisphere winter in Argentina, sparking a wave of cargo competition across multiple countries.

Furthermore, extreme drought is further impairing the navigability of key global shipping lanes. "This risk is growing larger on our radar screen," stated Lasse Kristoffersen, CEO of Wallenius Wilhelmsen. He revealed that the company has already secured transit slots in advance for its fleet and developed emergency rerouting plans.

LNG Demand Pincer from Asia and Europe Facing the pincer demand from both the Eurasian continents, the margin for error in global LNG supply has shrunk to virtually zero.

Florence Schmit, Energy Strategist at Rabobank, stated that every week Qatar's production is shut down, the expected supply surplus decreases by 1.5 million tons. "Even with high U.S. gas export flows, the global market is currently facing a structural supply deficit."

"If this situation persists for months and extends into the summer, the global market will have no spare alternative LNG sources," added Mathieu Utting, an analyst at Rystad Energy. "The two other major LNG suppliers, the U.S. and Australia, are already operating at full capacity, with almost no room to further increase utilization rates."

Against this backdrop, the Asia-Europe competition is intensifying. Ship-tracking data shows that, measured by a 30-day moving average, recent LNG deliveries to Europe have fallen by more than 10% year-on-year. In terms of trade flows, natural gas shipments from the Middle East to Europe plummeted from 1.093 billion cubic meters in March to 117 million cubic meters in April. While U.S. supply is struggling to support Europe's import base, capacity growth has hit a ceiling.

"Asian buyers need spot cargoes to supplement their long-term contract supplies. This will inevitably pull more Atlantic gas resources eastward," analyzed James O’Brien, Head of LNG at D.Trading, part of DTEK.

Data from the Swiss Federal Office of Energy shows that as of May 24, the overall storage level of EU gas facilities was only 38.2% of full capacity, a full 14 percentage points below the average of the past five years.

The difficulty of replenishing European storage is extremely high, noted Henik Fung, Senior Analyst in the Global Energy Team at Bloomberg Intelligence. Global LNG supply is highly concentrated in a few countries like the U.S., Qatar, Australia, Russia, and Malaysia. Qatar accounts for about 20% of global supply. Damage to related facilities in the recent conflict, with repair and maintenance timelines unclear, has directly created a hard supply gap of approximately 20%.

Given the severe deterioration in fundamentals, mainstream research institutions are significantly raising price forecasts. In a recent forecast report, Stephen Hare, Chief Economist at Oxford Economics, wrote that to reflect the market's strong expectations for tightening LNG supply, the firm has raised its average TTF price forecast for this year by $3.05 to $15.18/MMBtu.

Saul Kavonic, Energy Analyst at MST Marquee, issued a sterner warning: "We were previously in the traditional seasonal demand lull, and the full impact of the Strait of Hormuz closure has not yet fully materialized. If the waterway remains closed through the peak of summer, global LNG prices could surge another 50% from current highs by August."

Ibrahim also stated that since the onset of the Middle East situation, with no current "bypass" mechanism for natural gas, the market could remain tight as long as the strait remains blockaded. However, she believes subsequent price increases will not be excessively large: "This means prices will stay elevated for a period, but unless this supply disruption becomes more protracted, I don't foresee another massive price spike. Over time, new LNG capacity from other parts of the world will enter the market, providing a hedging effect."