Tight market sends TTF prices near record high

TTF Front Month prices soared back to more than US$60/million Btu on 27 July as the gas market reacted to the reduction of Nord Stream 1 flows to 20% of the facility’s capacity. This was the highest closing price since March this year, after which prices have eased but staying at elevated levels above US$60/million Btu since last week, which are near four-month highs. The closing price on 1 August was US$60.11/million Btu.

Russia blames the drop in flows on European nations for their imposition of sanctions, which has made it more difficult to maintain pipeline equipment. Russia claims it has no control over how much flow can be maintained through Nord Stream 1 because of the ongoing equipment issues, however, German manufacturer Siemens Energy, which is responsible for the maintenance of the Gazprom-operated pipeline’s parts, has said it had no reason to assume the turbines were broken, without having access to turbines or damage reports from Gazprom.

Russia recently halted gas supplies to Latvia and made an order for payments for Sakhalin-2 LNG volumes to be made via a Russian bank, further tightening the market. Gazprom had already stopped sending gas to Latvia on 30 July, and Latvia has already decided to ban Russian gas starting from 1 January 2023. Meanwhile, Russia asked Shakhalin-2 LNG customers to make payments through a Russian bank, as the rights to the project are being transferred from Bermuda-registered Sakhalin Energy to a new Russian limited liability company.

Central Europe is this week expected to experience high temperatures, with most countries being above the 22-year average for this time of year, but with slightly cooler temperatures expected at the weekend.

Twenty-seven EU countries agreed on 26 July to reduce gas demand by 15% from 1 August 2022 to 31 March 2023, compared with their average consumption in the same period of the years 2016 to 2021, which amounts to about 42.5 billion m³ of gas. Only Hungary is still opposing the plan and stated earlier this month it was not going to export fuel to other countries in the bloc. The agreement, which also includes provisions for sharing gas in the event of a supply crisis, is a critical measure that is now set to last a year. The individual EU countries are expected to fix the practicalities of this agreement soon. Member states will need to send gas to neighbouring states whose household or essential services face severe shortages, for which countries will need to arrange bilateral deals. The deal is a sign of solidarity between the countries and is set to avoid a panicked response in the event of a severe gas supply crisis. It also prevents countries from hoarding gas and refusing to help neighbours.

Germany has so far been the most active member state in seeking agreements with its neighbours. It has already made a deal with Austria and is expected to make another with the Czech Republic, while it is also in negotiations with Poland and Italy. Germany is Europe’s biggest gas consumer, with more than 50% of its gas supplies in 2021 coming from Russia before the invasion of Ukraine – and with as-yet unfinished LNG terminals, Germany is desperate to secure supplies in case gas supplies are fully cut off.

A serious gas shortage in one of the biggest European economies could cause a major economic crisis in the country and negative impacts on other EU member states.?France’s President, Emmanuel Macron on 28 July met with Saudi Arabia’s Crown Prince Mohammed bin Salman asking for help with diversifying Europe’s energy supplies.

Asia

Asian spot LNG prices jumped on 27 July – the day of further Nord Stream 1 flow reductions – to US$43.13/million Btu, before rising on 1 August to US$44.83/million Btu – close to record-high prices. As COVID-19-related controls have been partly loosened, China’s gas demand is likely to trend higher in the coming months – however, the actual buying of LNG has yet to rebound. Some importers have likely cancelled their bookings for regasification capacities to avoid high LNG costs, also because of ample inventories. Capacity booking at PipeChina’s receiving terminals is at about 44% for August 2022 compared with 67% for December 2022.

Demand is not high enough to justify high spot prices, indicating that the market is being largely driven by the gas situation in Europe. Comparing the first six months of this year with last year’s first half, China’s LNG imports this year amounted to about 28.5 million t of LNG versus 38.3 million t a year earlier.?With LNG demand this year being so soft, we may yet see the country lose the title of the world’s largest LNG importer that it attained last year by importing over 77 million t of LNG. We see that China’s LNG imports could record an above 10% y/y drop in 2022, given the weak first half and the tepid outlook for the second half.

Japan’s LNG imports from the first six months of the year have also declined, although only dropping by less than 2 million t compared to last year’s first half.?Asian countries are in general cutting demand for natural gas, with China boosting its domestic coal output and consumption, while Japan and South Korea are trying to increase the use of nuclear and coal in power generation.

US

US gas prices are at a 14 year seasonal high as the country battles persistent high temperatures and resultant soaring cooling demand for gas. Henry Hub gas prices rose to US$8.99/million Btu on 26 July, before falling to US$8.283/million Btu on 1 August. In the west, prolonged droughts and reduced hydro-electric generation have also contributed to elevated gas use. At the same time, the US has become the largest LNG exporter, with 42 million t of LNG exported in the first six months of 2022, about 6 million t more compared with the same period last year. This 17% increase of US supply has been mostly absorbed by Europe, which is desperately seeking the replacement of Russian piped gas. Since mid-June, the US has not been exporting at its full capacity due to the ongoing outage at the Freeport LNG facility in Texas, which has affected 15.3 million tpy of capacity. Despite this outage and as a result of above-mentioned factors, current US gas inventories are below the five-year average and last year’s number. US underground storage as of week 29 (22 July) was at 2.416 trillion ft³, which is 260 billion ft³ below last year’s level. In the absence of the Freeport LNG outage, gas inventories could have been even lower and prices in the US even higher. With Europe still scrambling for LNG, prices are likely to stay elevated for the near future.

Read the article online at: https://www.worldpipelines.com/special-reports/03082022/tight-market-sends-ttf-prices-near-record-high/