Despite short-term balance, global gas markets not out of the woods yet
After a tumultuous week for TTF prices, which rose to and then tumbled from all-time highs of nearly $60/Mmbtu, the market is more balanced in the short term as a result of LNG supplies of at least 0.8 million tonnes across 11 tankers being re-directed from Asia and an upward revision to near-term temperature forecasts across northwest Europe.
However, flows in the Germany – Poland section of the Yamal Europe pipeline have been in reverse mode for the ninth straight day, raising eyebrows as storage clocks at only 55% capacity and may create some price support even in a bearish environment.
LNG diversions from Asia are a useful stop-gap measure but are not a sustainable substitute for stable pipeline supplies, considering LNG is a waterborne commodity and demand in Asia may yet see an uptick in January.
Further, given the low likelihood of Nord Stream 2’s approval in the first half of 2022, prolonged zero or reverse flow will accelerate storage withdrawal and may reflect higher restocking demand in the injection season of 2022, effectively flattening any potential backwardation in the TTF forward curve.
In the US, prices crept up with Henry Hub back in $4/Mmbtu territory due to colder weather forecasts in the near term, but the outlook remains mixed further out, injecting some volatility into the equation.
However, supply risks are unlikely to be a factor as storage levels are trending marginally higher than the five-year average for this time of the year. As a result, US gas prices will continue to remain isolated from the turbulence in Europe and experience only limited upward price movement through the first quarter of 2022, barring any unexpected cold snaps.
The demand for LNG in Asia hit a roadblock last week as prices approached $45/Mmbtu, indicating a possible resistance level for the region that clearly favors alternative fuels as an alternative to LNG this winter. However, demand could recover in light of the TTF and Asian LNG prices again converging at the low $30s/Mmbtu.
On the supply side, Prelude FLNG was directed to stay offline until it can demonstrate adequate safety measures, a move that may take at least 1.5 million tonnes of production off the market through 2022, dampening an improved supply forecast and setting the scene for another year of elevated prices as offtakers seek out alternative supplies.
In some good news, the market can take heart in the spot charter rates declining to under $100K per day across all basins, a reflection on improved vessel availability and low traffic at Panama now that vessels are rallying around Europe.
However, charter rates for delivery to Asia could soon rebound if an unexpected cold snap hits the region in January 2022 and traffic piles up at Panama again.
Volatility persists globally, and as witnessed in January 2021, the gas and LNG markets are not out of the woods just yet.
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