Timing is key for European LNG

With European gas prices surging at peak to 10 times pre-crisis levels, the market did its work, drawing additional volumes from Europe’s North Sea, North African, and Central Asian producers. European benchmark TTF prices traded at a premium to Asian JKM, sending a sufficiently strong price signal to attract LNG cargoes from the US, Africa, and the Middle East that were previously directed at Asian markets. Although this TTF premium has subsided as of late, a return to the TTF premium is required for Europe to continue to attract enough cargoes to fill storage for the upcoming Winter.

European gas benchmarks’ peak in August was driven by concerns that waning Russian supply would leave continental inventories insufficient to meet demand if there were to be a particularly cold Winter. Those concerns were reasonable since the collapse in Russian pipeline gas exports was severe. Flows peaked at approximately 11 billion ft³/d in early 2022, but had fallen to just under 2 billion ft³/d by January 2023.

But despite the Russian shutdown and the subsequent attack on the Nordstream pipeline system serving Germany and northern Europe, Brussels’ successful efforts to reduce industrial demand combined with aggressive LNG purchases meant that Europe headed into the Winter months with storage above target fill levels. Early mild Winter weather eradicated the risk that stocks would be insufficient and gave a tailwind to falling prices, already well down from the mid-2022 highs.

Even though there is still at least a month of Winter to run, record-breaking high Winter temperatures across Europe have put gas supply concerns for this Winter firmly in the rearview mirror, pulling the February TTF contract down to US$19/million Btu vs the US$102/million Btu peak in late August. Although driven more by domestic supply/demand imbalances, US gas prices saw a similar dynamic play out with the February 2023 NYMEX contract peaking in late August at US$9.30/million Btu, before beginning its volatile ride down to recent levels at approximately US$3.30/million Btu amid ongoing delays in the restart of Freeport LNG and the record warm start to January.

In Europe, the market focus is now switching to how the continent will replace the approximately 55 billion m³ of Russian pipeline supply this year no longer available through Nordstream. While Europe’s LNG imports will rise again this year, EU policy aimed at moderating demand on top of the impact of high prices on consumption, will keep volume growth within bounds. Still, Europe’s readiness to out-bid Asian buyers for cargoes in 2022 suggests that LNG will make up the shortfall. In a competitive market, it will be price that rations that supply, implying that Europe will continue to be the premium destination for LNG producers, rather than the discounted sink for cargoes it was until 2022.

Price outlooks diverge

The competition for LNG outside the US has left global gas markets divergent on price direction this year. Europe’s challenge in 2023 will be rebuilding inventories ahead of the 2023/2024 Winter with sharply lower Russian flows during the year, while the US risks being oversupplied in the near term as supply grows but domestic demand growth remains tepid. Enverus expect 3.6 billion ft³/d of average US supply growth in 2023 but only 1.4 billion ft³/d of average demand growth, which will drive a robust recovery in Summer storage inventories and keep prices under pressure below US$3.50/million Btu. For Europe, although inventory levels are robust for now, the upcoming injection season will prove to be tougher than last Summer, with no prospect of any meaningful increase in Russian flows after the September 2022 destruction of the Nordstream pipelines and the potential for increased competition from China for spot cargoes as the country rebounds in 2H23.

The central role LNG will play in meeting near-term European gas demand is clear. But the timing of incremental LNG supply is also critical to markets. Changes to the timing of the Freeport LNG outage in 2022 demonstrated just how sensitive US gas prices are to the utilisation of existing projects. But the raft of new liquefaction projects slated to come on through the middle of the decade will have a major impact on trade flows to Europe as well as US gas prices. With another wave of US LNG projects due onstream in 2025 – 2027, the timings of those start-ups will start to drive the shape of the forward price curve as expectations harden towards the end of 2023. Enverus expects new US LNG projects to require 13.5 billion ft³/d of feedgas by the end of 2023, with a wedge of new supply requiring nearly 5 billion ft³/d in the 2025 – 2027 timeframe. All of this is gas that should be available to meet rising European LNG demand.

Written by Bill Farren-Price, Enverus.

This article was originally published in the February 2023 issue of LNG Industry. To read the full article, sign in or register for a free trial.

Read the article online at: https://www.lngindustry.com/special-reports/09022023/timing-is-key-for-european-lng/