Eerie calm

Global gas and LNG benchmarks are flatlining on the eve of winter. How long can this market tranquility last? EU LNG chart deck: 18 Sep-6 Oct 2023

It’s the ‘shoulder season’ and global gas markets have duly softened. Unable to absorb more molecules, Europe has loosened its grip in the tug-of-war with Asia for liquefied natural gas (LNG), creating a brief restocking opportunity for buyers east of Suez. Markets are still pricing in a premium for winter LNG deliveries into Europe, but the opportunity to float cargoes into high-price colder months has evaporated. The question now is, how long can this state of eerie calm endure — and what will trigger the next bout of sparring?

Mild autumnal temperatures are keeping a lid on northern hemisphere cooling and heating demand. Gas flows into Europe from Norway have recovered post-maintenance, and (what remains of) Russian pipeline exports are stable. With EU storage levels at or near their technical capacity, front-month TTF — the European gas benchmark — has lost a lot of ground against JKM, the Asian LNG spot price.

The TTF forward curve has, as predicted, softened considerably since the last chart deck instalment. The sharpest drop was registered in November, which became the front-month when the October contract expired in late September.

This sustained a small contango — but the spread is today nowhere near enough to justify floating cargoes into the colder winter months. As discussed previously in Energy Flux, pulling off the Oct-November float was always going to be tricky as the clock was ticking fast. By the time the arbitrage caught widespread attention, the opportunity had already passed.

Extending the float into December was strewn with risks that have since manifest. There is no incentive to attempt a similar float into January.

As the arbitrage window closed, demand for LNG vessels (to be used as floating storage) melted away. And as if by clockwork, freight rates suddenly fell from recent peaks. This is probably the most decisive lag indicator that near-term global LNG trade dynamics have turned a corner.

There is another reason Europe does not need so much floating storage this year compared to 2022: Ukraine. Reverse flows of gas from Poland, Slovakia, Romania and Hungary into Ukraine’s ample underground storage tanks surged in recent weeks, which — if continued — could provide a healthy cushion in the event that winter demand finally kicks in across the northern hemisphere and Europe must again compete for spare LNG cargoes.

In the absence of pre-war levels of Russian piped gas this cannot be ruled out, but as of today the prospect of another Europe-China LNG bidding war seems distant. JKM, the Asian LNG benchmark, also fell quite a bit since the last chart deck. Notably, the biggest declines occurred over the winter months when resurgent heating demand might otherwise be expected to push prices higher.

On the face of it, there’s a healthy premium to be had from diverting US LNG cargoes through the Panama Canal and into premium Asian markets…

…but winter LNG trade remains finely balanced and markets are pricing in a ‘European premium’ from December onwards.

However, do not be mistaken: this does not necessarily mean Europe is about to see a big resurgence in industrial or heating demand for gas. Nor does it mean that the economics of gas-fired power are about to improve in the face of soaring zero marginal cost renewables generation. Furthermore, the flagging European carbon price is making space for coal at the margins and putting clean spark spreads under pressure.

What does all this mean? My two cents: Europe continues to lean on LNG for energy security in the absence of Russian pipeline gas, and the default market view is that European buyers will pounce and outbid rivals in Asia on the slightest indication that the market is tightening. But European gas demand took a battering in 2022 and fundamentals remain weak. Yes, the market is jittery and will over-react to anything resembling a supply (or demand) shock. It’s just hard to tell where that shock might come from, even as winter looms into view.

Seb Kennedy | Energy Flux | 9th October 2023

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