The past couple of months have given natural gas market participants in North America demonstrable evidence of domestic ramifications arising from a rapidly expanding global LNG market. This week’s headlines on this front were dominated by the emergence of Chinese bound cargos being re-marketed. Traders in North America, Europe, and Asia have been forced to reckon with 50+ cargos of Bal 2022 LNG hitting markets that were already unstable as a result of widespread BTU shortages, political uncertainty, and ever-present weather risks which are no longer isolated to intra-region dynamics.
In late December, while temps were exceptionally mild in North America, there was a prolific run-up in European natural gas prices led first by low inventory, compounded by colder than normal temps, and further exacerbated by nuclear-fired power plant outages. These events led European natural prices to almost $60/MMBtu, and competition for cargos of much-needed fuel for heat and power pulled Asian prices to almost $50/MMBtu. All the while the NYMEX benchmark location was trading quietly near $4/MMBtu.
Since pre-holiday European and Asian explosiveness, downstream LNG markets have cooled substantially with this week’s Chinese re-selling efforts adding additional weight to markets which at one point appeared to be unbounded on the upside. The front of the TTF curve is back trading sub $30/MMBtu, and JKM is only marginally over the $20 mark. Henry Hub on the other hand awoke from the Holiday slumber to a sharp rally which propelled February futures to just under $5.00 before giving way to the domino effect of crumbling downstream markets. With the front of the NYMEX curve settled back in near $4.00, spreads of more than $15.00 to downstream demand markets, and more than 2 months of winter remaining it will be interesting to see whether or not a desperate bid for BTUs shows up again before attention turns to re-fill season in North America and Europe.
Presently the short-term (15d) weather forecast calls for colder than normal temps across much of North America, while normal temps are forecast for Europe, and a mixed bag is forecast in Asia. Weather models depict a slightly colder than normal interior China, normal Japan, and warmer than normal Korean peninsula. If two out of the three most important consuming regions in the world end up leaning colder than normal at the same time there could be renewed competition for MMBtus. In today’s world, this can quickly materialize when Northeastern U.S. markets are forced to import LNG to meet daily demand. The Everett and Canaport LNG import terminals, which serve Boston and metropolitan areas north of Boston, at times are called on to satisfy demand in excess of available flowing supply from underground storage and daily dry gas output.
Interestingly these same Northeast markets which often trade at deep discounts to Henry Hub in the summer months can be thrust into competition with European and Asian buyers in peak winter. What global gas markets have not yet lived through is an environment where the isolated issue of undersupplied Northeastern U.S. markets reverberates back upstream to the Midwest and/or the Southeast. Consider what might transpire if the Chicago, Houston, and Atlanta metro areas were all significantly colder than normal without the benefit of a large storage buffer. In such a situation it is conceivable that daily natural gas prices near these market areas could be forced to price high enough to discourage LNG feedgas deliveries. Last February the market got a glimpse of this during a record-setting cold event. Astute market participants will wisely consider how such a dynamic could be prolonged if daily withdrawal rights from North American storage facilities plus flowing supply are insufficient to satisfy daily demand.
This was a factor that was front and center for the NYMEX natural gas market heading into winter, and then a record-setting warm December shelved the concern. Recently the risk of local markets having to compete with LNG feedgas buyers was expressed through a dramatic rally in January and February basis pricing in the Mid-Continent and Western U.S. Multiple dollar rallies were seen in several markets and until this week these lofty premiums to the Gulf Coast were still in play. However, with the clock ticking away on winter ‘21/’22, and the odds of a sub 1 Tcf winter now down to 5% or so, both NYMEX and basis markets are sliding back into a slumber which could be abruptly disrupted if the latter half of February or the first half of March bring on elevated heating demand which is understandably priced in-elastic.
Looking beyond the winter, globally aware gas market participants will center their focus on the European refill season and whether or not the Nord Stream II pipeline will actually provide a much-needed source of incremental supply to Europe. Recent developments on that front do not look promising for Nord Stream with troop and supply build-ups around Ukraine. The most recent statements from the German government indicated that it would be mid-summer at the earliest before any decisions were made re: start-up of Nord Stream II. Considering European storage remains dangerously low, and all efforts to utilize alternative fuel sources are already in play, the early part of injection season in North America and Europe could create a competitive environment for methane molecules not already spoken for.
Producers and consumers alike should remain well aware that what is transpiring in their backyard may not be as singularly relevant as it may have been in the past. Market participants are being forced to expand their vantage points from a weather perspective, underlying S&D perspective, and even contemplate geopolitical tensions more akin to their crude trading counterparts.
Zane Curry
Zane has been with Mobius Risk Group since February of 2016. His primary responsibility is a fundamental analysis of the North American natural gas market. Additionally, he assists in the valuation of gathering, processing, transportation, and physical sales agreements. His experience in energy has been focused on natural gas, however, as the North American hydrocarbon value chain has become a more integrated system his knowledge has expanded to crude oil, petroleum products, and seaborne LNG. Prior to joining Mobius, Zane spent 6.5 years with a Houston based hedge fund (Goldfinch Capital) with AUM of approximately $750M. In his time with Goldfinch Capital, Zane was tasked with developing detailed models of the North American natural gas market, including 1st derivative components such as power generation by fuel source, supply side impacts of liquids focused drilling, etc. Zane is a graduate of Rice University, and a former member of his alma mater’s baseball program as both a player and coach.