By: Reuters – The global liquefied natural gas (LNG) market is undergoing a triple flattening, with prices, volumes, and seasonality leveling off after a period of volatility.
While much of the market focus has been on the softening of spot prices amid signs that Europe has sufficient natural gas in storage for the upcoming winter, the more important dynamic is the current lack of seasonality in expected futures prices.
Spot LNG has in the past been a commodity that experiences peaks and troughs in demand and pricing, based on seasonal peaks for winter and summer in the main northern hemisphere markets of North Asia and Europe.
However, this year the spot price has been softening ahead of winter. The scramble for LNG, particularly from European utilities, has eased amid signs that the continent will have sufficient natural gas for winter.
Europe’s demand for LNG soared after Russia’s invasion of Ukraine on Feb. 24 led to lower pipeline supplies from the continent’s major supplier. There were fears of a complete shutdown of flows as the European Union took ever-increasing steps to cut off revenue and markets for Moscow, which calls its actions in Ukraine “a special operation”.
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The weekly assessment for spot cargoes for delivery to North Asia dropped to $28 per million British thermal units (mmBtu) in the seven days to Nov. 4. That’s the lowest since June – and down 60% from the record high of $70.50 in the week to Aug. 26.
It’s worth noting that the price is now below the $29.50 per mmBtu that prevailed in the same week last year, and has dropped for the last seven weeks.
Last winter, the spot price peaked at $48.30 per mmBtu, in late December, before dropping to $23 by late January.
The forward curve for futures traded in New York and linked to S&P Global Commodity Insights’ benchmark JKM price indicates that prices are expected to hold around current levels for an extended period.
The contract expiring on Nov. 15 was at $28.93 per mmBtu at the close on Nov. 4, while the December-expiring contract was at $29.25, January was $30.19 and February was $29.20.
However, rather than dipping into the middle of next year, the July 2023 future ended at $32.86 per mmBtu, and every contract between then and the end of 2023 was priced above $30.
This contrasts with the futures curve from the same week in 2021, which showed that prices were expected to hold around $30 per mmBtu until February of this year, before falling to around $15 by the middle of 2022.
The Russian invasion altered this dynamic. More than just keeping price expectations at what are high levels by historical standards, it has also largely eliminated the seasonal highs and lows.
What the term structure is signaling is that LNG demand may be fairly constant over the year, rather than rising and dropping with the change in seasons.
This is because Europe is likely to have to keep buying year-round in order to ensure sufficient natural gas is in storage for the winter heating peak.
FLOWS EVEN OUT
Certainly, the flow data appears to be supporting the view of steady demand in both Asia and Europe.
Total Asian imports were 20.61 million tonnes in October, little changed from September’s 20.25 million, according to data compiled by Refinitiv.
It’s also worth noting that October’s imports were down 6.3% from the 22 million tonnes in the same month last year. This is largely a reflection of lower demand from China, which is set to lose its spot as the top importer of super-chilled fuel to Japan this year.
Europe’s LNG imports were 10.79 million tonnes in October, up from September’s 9.68 million, but below the three straight months of imports in excess of 11 million recorded from March to May.
After jumping higher in the months after the Russian attack on Ukraine, Europe’s LNG imports have leveled off, and have been anchored in a fairly narrow range of around 10 million tonnes per month.
Overall, the LNG market is showing several trends, including structurally higher European imports, and an end to seasonal demand and price volatility.