European markets react to Russia-Ukraine de-escalation, but global markets remain bullish
European gas prices are shaking off some of their recent volatility and reacting to the relative calming of Russia-Ukraine tensions as Russia announced the withdrawal of some troops from the border.
Gas markets are taking heart from the Russian-Ukraine news, and TTF prices fell to just over $23/Mmbtu on Wednesday.
The news is not all rosy, though, as upside risk and volatility are likely to persist over the short term as the future of the conflict remains shrouded in uncertainty.
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In Europe, the market has interpreted Russia’s troop withdrawal from the Ukraine border as a sign of de-escalating tensions, diffusing some of the risk premium the TTF has carried over the past few weeks.
LNG imports into the continent are robust, sitting at 4.9 Million tonnes so far in February, while demand has been muted mainly due to milder-than-average temperatures.
The pace of withdrawal from storage in Northwest Europe has slowed considerably, with storage levels around 10% below 2021 volumes at this time, compared to the 25% below 2021 volumes observed in January.
The European weather outlook looks likely to provide additional downward pressure on gas prices, as mild weather and strong wind forecasts, specifically in Germany, will weigh on gas demand in the near term.
Additional downside movement in prices may be limited due to concerns over EDF’s recent downward revisions to its nuclear output guidance in France, for which coal and gas are the most obvious backups.
There is broad skepticism over the scale of Russia’s troop withdrawal from the Ukraine border, and the underlying issues between Ukraine and Russia remain unresolved, which may result in continued diplomatic overhang on commodity markets and the Nord Stream 2 pipeline, potentially keeping prices elevated.
US gas prices are likely to remain bullish in the immediate future as frigid weather looks set to continue over the next few weeks, spurring additional gas demand for heating.
US gas storage has started to lose some buffer, dropping to around 10% lower than the five-year average levels.
Record international gas prices mean any gas that can be exported is being exported: feedgas supply to Calcasieu Pass has ticked above 400 MMcfd, more than twice the levels seen a week earlier.
However, the cold weather-induced production outages and fluctuations that have not helped domestic balances in recent weeks are expected to ease, and the production outlook for the rest of 2022 is robust.
We expect that the Henry Hub will average around $3.5/Mmbtu for 2022.
In Asia, activity in the Chinese markets has picked up following the Lunar New Year, with industrial plants gradually resuming operations, which is likely to spur additional gas demand, even as LNG inventories in China are believed to be ample.
Colder than average temperatures in Japan and South Korea so far in February have likely depleted LNG inventories, which may generate re-stocking demand for April.
High coal prices due to an unexpectedly slow resumption in exports from Indonesia and hampered production in Australia have lifted the coal-to-gas switching price, effectively diffusing downward momentum in Asian LNG prices.
However, this may be a short-lived impact as the market expects Indonesia’s export backlog to ease over the next couple of months.
The improved outlook for coal-fired generation in Japan, following the end of maintenance of nearly 2 GW of coal-fired capacity, may put downward pressure on LNG demand.
Asian LNG prices may also experience a bearish readthrough from the TTF.
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