Gas markets mostly bullish, driven by global supply concerns and low European storage
After some days of calm, market sentiment is again skewed to the upside as new supply concerns in Europe have emerged.
In Europe, TTF prices corrected sharply upwards after an unplanned outage at the Troll Gas field in Norway saw flows drop by around 14% on Wednesday.
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Some near-term volatility is likely until the extent of the outage is established.
However, any lost volumes from Norway can only translate to an accelerated drawdown from Europe’s already inadequate storage.
Another bullish driver is the rising geopolitical tension along the Russia-Ukraine border, which could create additional hurdles for the Nord Stream 2 pipelines, which the US appears to view as a bargaining chip to mitigate the risk of Russian military action.
Bouts of cold temperatures and stable but weak flows from Russia to Western Europe have resulted in an accelerated drawdown of European storage by 4.5% on the week, higher than the 4% withdrawal observed the week before.
As a result, storage now stands at only 70% of capacity.
Europe risks a withdrawal to between 12% - 20% of notional capacity by April 2022, which may sustain restocking demand and support TTF prices into the second quarter of 2022.
That said, cold snaps have been somewhat inconsistent, and weather expectations are now slanted towards a sporadically cold rather than a sustainedly cold winter.
Bearish sentiment is currently predominant in the US, with the Henry Hub now parked into sub-$4/Mmbtu territory, a welcome respite for the domestic market from the $5 plus/MMBtu prices observed through much of October and November.
Mild weather forecasts for much of the US through December have led to limited gas burn for space heating, helping lower prices.
However, unseasonably cold temperatures could visit the region near peak winter in January and introduce price volatility.
Favorable gas prices may limit fuel switching to coal and arrest any sharp downward correction.
The short-term outlook for US dry gas production looks positive, with an increase from around 97.7 BCFD in November to about 98.2 BCFD in December expected.
LNG demand remains muted in Asia, with high inventories in Japan and China and robust pipeline gas imports into China.
Parts of Northern China are under high pollution alerts, with industrial facilities reducing their operations and limiting gas and LNG uptake as a result.
That said, Chinese buyers continue to monitor the weather to guide buying decisions, with a cold snap expected to hit Northern China this week, which may drive some bullish sentiment again.
As observed through 2021, an upward correction in the TTF will likely be reflected in the Asia Spot LNG prices.
Though the market initially shrugged off the supply impact of the unplanned shutdowns at Gorgon LNG Train 3 and Prelude FLNG, we expect supply concerns to take hold soon if outages are prolonged and offtakers are forced to short cover or find replacement cargoes.
The combined impact of both outages could be up to 6 cargoes in December, potentially offsetting incremental production out of the newly started up Sabine Pass Train 6.
However, logistical problems have eased somewhat with reduced congestion at the Panama canal and a marginal improvement in spot tonnage availability driven by the ongoing LNG outages.
Overall we expect the market sentiment to be skewed to bullish, with supply concerns and low storage in Europe once again at the center of gas markets’ attention worldwide. That said, the outage duration at Troll is unknown at the moment, and we may see a price correction if flows are restored promptly.
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