All is quiet except the Western (Australian) front [GGP]
Volatility has returned to gas markets as workers at Chevron’s Wheatstone platform and LNG facility, as well as the Gorgon LNG facility in Australia, went on strike on 8 September after the five-day negotiations with the US supermajor failed.
The front-month Title Transfer Facility (TTF) opened at over $12 per million British thermal units (MMBtu) on 8 September, which is 25% lower than the recent high on 22 August, when concerns over the impact of the strike were only pervasive.
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However, the potential impact of the strikes is likely the only bullish element in the near-term market, given we have now entered the pre-winter shoulder season and other indicators are bearish in both Europe and Asia
A complete shutdown of production at Gorgon and Wheatstone would impact around 6% of global production but this remains a tail risk in our view, given the precedent already established at the neighboring Northwest Shelf.
Given the importance of these facilities for Northeast Asian buyers – more than 68% of capacity is contracted to Northeast Asian buyers (with actual exports to Northeast Asia over 80%) – we anticipate Chevron is under pressure to accelerate resolution.
At the risk of sounding like a broken record, the countries where winter demand could surge (and price insensitive) are very comfortable this year.
European storage is now over 92% full, while South Korea and Japan have additional nuclear capacity available this winter year-on-year.
As such, an increase in prices is more likely than not to simply see demand from the more price-sensitive countries recede.
Recent economic data from Germany also paints a bearish picture for the rest of the year.
As of July, German industrial production remains 7% below pre-Covid levels, and production in energy intensive sectors is 11% down on the year.
The economic outlook has worsened since GDP data for the second quarter implied a stagnating, rather than a contracting economy.
Industrial gas consumption is likely to be wary of the current unstable equilibrium in the gas market and, as such, a material recovery can only be expected once a period of sustained calm is achieved – the $2.7/MMBtu spread on the forward curve between November-delivery and January-delivery is not helping.
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