Global LNG still bullish in the face of Omicron headwinds
Natural gas prices may face headwinds from the Covid-19 Omicron variant and doubts over vaccine efficacy, which is causing a pullback in energy commodities worldwide, but bullish factors are still at play as temperatures drop and the saga of European supply uncertainty continues.
In Europe, forecasts pointing to below-normal temperatures and an accelerating withdrawal from the already low storage levels are supporting TTF prices.
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Storage levels are down 4% from last week and assuming a 5-year average depletion profile between now and end March 2022, storage levels may start April 2022 at a very low 21% of notional capacity.
However, European storage risks drastic depletion to around 12% of the notional capacity by April 2022 if we consider a depletion profile similar to earlier this year, which may happen if the winter continues to be severe, wind generation fluctuates, and substantial additional supplies from Russia are not forthcoming.
Gazprom will rely on day-ahead capacity booking on the Yamal-Europe pipeline throughout December, which could inject some volatility into prices as traders are left guessing how much volume will materialize day-to-day.
Moreover, the recent surge in carbon prices, which are rolling into new all-time highs day on day, may throw a spanner in any plans for runaway gas-to-coal switching.
That said, we note that LNG imports continue to be robust, with Western and Southern Europe importing around 6.8 Mt in November, up from 5.7 Mt in October, which may contribute some level of comfort to the market for the end of 2021.
In the US, consistent forecasts for mild weather going into December have placed the Henry Hub deep into sub-$5/MMBtu territory.
Nevertheless, we are now firmly into the withdrawal season and storage depletion may accelerate if the weather takes a turn for the cold and residential heating demand increases sharply.
TTF and Asian LNG prices at $30-plus per MMBtu continue to provide a significant source of competing demand for exports. Therefore, despite a significantly improved domestic balance, the US market cannot rest easy that supply for its own consumption will always be sufficient until international prices have adjusted downwards.
In Asia, Japanese and Korean buyers have reluctantly stepped back into the spot market to procure supplies for January amid sustained cold temperatures, expectations of a colder-than-normal winter, and ongoing production concerns at the Bintulu LNG complex in Malaysia.
Those waiting for prices to correct downwards over the past few weeks may have been left disappointed and chosen to buy pre-emptively as price risk remains skewed to the upside as we approach peak winter in the tightest LNG market on record.
Chinese buyers remain priced out of the spot market and China is expected to steadily raise the already high volumes of pipeline imports from Russia from around 28 million cubic meters per day now to a potential 43 million cubic meters per day by year-end.
We note a drop in LNG vessel deliveries to China, though this may be related to China’s new law governing data privacy. This may reduce transparency on LNG deliveries into the world’s currently largest LNG importer and inject another element of chaos into a very volatile market.
In addition to production from the now commissioning Sabine Pass 6 and Calcasieu Pass facilities in the US, we can expect some marginal improvement to LNG supply availability through year-end, assuming no further disruptions.
Feedgas at Freeport LNG in Texas is again testing the 1.7 BCFD levels, though we would need to see it hold at those levels before concluding that the ordeal of fluctuation that has plagued the facility since September is over.
Egypt may also be able to supply some additional volumes, having increased exports by about 45% from October to November as domestic demand is generally limited during winter.
After being taken offline on 16 November, Gorgon Train 1 in Australia restarted production on 26 November, with the production loss limited to two cargoes, only to be replaced by an outage at Gorgon Train 3, which has been taken offline to repair piping at its dehydration unit. This may leave the market no better off if the outage duration stretches beyond a week.
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