Grin and bear it

Published at 09:29 30 Sep 2019 by . Last edited 11:24 30 Sep 2019.

The start of winter features some very low prevailing prices in the global gas markets, with JKM contracts for delivery in winter 2019-20 now all below 7 $/mmbtu. While there is always winter weather risk that can provide some support, the downside continues to dominate as Asian demand growth continues to lag the rise in supply. 

Our balances have not changed materially. We forecast global supply to be up y/y by 17.3 Mt over winter 2019-20, with Asian demand growth taking 8.0 Mt more y/y. With the rest of the world’s LNG demand also looking soft, that leaves a good 9.9 Mt y/y of LNG supply available for the European market. Europe will be better able to absorb that gas if there is a colder-than-normal winter, while another mild winter would further loosen balances in the European and global gas markets. Some downside to the EU supply numbers does come from Korea, where steps to improve air quality could see some 11 coal-fired power plants closed over December 2019-March 2020, which could boost Korean LNG takes over that period by some 2.8 Mt. 

If winter weather is normal in both Europe and Asia—seasonal forecasts are largely pointing to normal or warmer-than-normal temperatures—the summer 2020 global market could come under pressure. Our European balances put storage at end-March 2020 some 4 bcm higher, with Europe having to take another 12 Mt or so of incremental LNG supply. With less empty storage capacity to inject into y/y and less available demand response from the power sector, it will be hard to see Europe taking all of that LNG. This does hold out the risk that 4.5 Mt of supply will not be able to find a home in Europe and will have to be locked into the US.  

There are some risks that could create more space for gas in the European market. The TTF jumped on news that utility EDF had found manufacturing anomalies in an unspecified number of reactors. When clarity came that the number of potentially affected reactors amounted to 5.8 GW, the market breathed a sigh of relief as expectations were that more capacity could have been affected. The rally was reinforced by further signs that the Dutch government wants to end Groningen production as quickly as it can, meaning further y/y losses in production.

However, most of the risk is in Q1 20, when Gazprom’s contract for transiting gas through Ukraine expires. There are multiple risks around Russian flows this winter, including the fate of the Nord Stream 2 (NS2) pipeline and use of the downstream OPAL pipeline. Still, we expect resolution of both the Russia–Ukraine transit issue (at least for Q1 20) and NS2, which would be broadly bearish for the TTF Sum-20. Without some cold weather in NE Asia, this will drag the JKM down. With normal weather and no major supply outages in winter in Europe, peak winter TTF Q1-20 prices could fall towards 16.7 €/t (5.4 $/mmbtu) and our forecast JKM-TTF spread of 1.1 $/mmbtu would take JKM pricing to 6.5 $/mmbtu for the peak Jan-20 and Feb-20 contracts.

Given that the Sum-20 contracts remain buoyed by weather risks for winter 2019-20, persistent high stocks through Q4 19 should weigh on Q1 20 prices and will start to depress Sum-20 prices. When winter weather risk recedes is when we see the greatest potential for the M+2 prices to start to close the arbitrage windows between Henry Hub and the JKM/TTF. With our forecast of summer US Henry Hub prices around 2.25 $/mmbtu, TTF prices need to head to around 3.7 $/mmbtu. For a less bearish scenario to happen, the northern hemisphere needs to be cold.

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