Goldman Sachs Commodities Research analysts this week reiterated their belief that last summer was “the peak of the current bearish cycle in global gas markets,” saying in a forecast that they expect tighter conditions in Asia, Europe and the United states through next year.
Goldman analysts said they see this year’s bearish drivers “largely reversing” as global liquefied natural gas (LNG) capacity additions slow, weather normalizes from milder temperatures in years past — especially as La Niña favors colder patterns in Japan and South Korea — and as LNG buying in Asia has strongly rebounded from summertime lows.
The firm said in particular that it expects steeper withdrawals from European natural gas storage inventories this winter compared to last, which would better accommodate U.S. LNG imports. Normal storage withdrawals would allow the Dutch Title Transfer Facility (TTF) “to balance in 2021 by pricing against coal at our $4.70/MMBtu forecast through next summer, as opposed to pricing supply out at sub-$4.00 levels,” Goldman analysts said. TTF is the leading benchmark tied to LNG sales on the continent.
Europe is the top destination for U.S. LNG exports given how much closer it is than Asia, its robust natural gas infrastructure, strong demand and highly-liquid trading markets. Offtakers have moved 200 cargoes to Europe this year, accounting for nearly half of the 461 cargoes that have departed the United States so far in 2020, according to NGI data.
Warmer winter weather last year left European storage inventories near record highs. A glut of global supplies and lackluster demand amid the Covid-19 outbreak also forced U.S. LNG suppliers to shut-in production as buyers elected to cancel cargoes when prices plummeted and it proved uneconomic to move American natural gas overseas. As winter nears, the trend has reversed and U.S. feed gas deliveries are at record highs.
Goldman is forecasting TTF to average $4.70/MMBtu this winter and summer, while it expects JKM to average $5.80 this winter and $5.50 this summer.
But as 2021 nears, some are more skeptical about the global natural gas market’s rebound.
“If European storage levels are to normalize this year, it will take a big ask from weather,” said analysts at Tudor, Pickering, Holt & Co. (TPH). Including Ukraine, TPH noted earlier this week that inventories are entering winter 100 Bcf higher than this time last year. European storage capacity was at nearly 92% on Thursday, while Ukranian stocks were at 74%. European traders have increasingly turned to Ukranian storage capacity to handle higher natural gas volumes this year.
TPH also said that competitive pipeline imports in Europe are poised to be higher this winter from places like Russia and North Africa, which could force some LNG out of the market. The Trans Adriatic Pipeline, which would move natural gas from Azerbaijan to Europe, has been commissioned and entered service this month. It is contracted to move 1 Bcf/d and opens a fourth gas import pipeline corridor for the European Union.
If the U.S. market does tighten as global markets improve and other domestic factors such as falling associated gas production push Henry Hub prices up, it could narrow the arbitrage spread between the United States and key markets overseas next year, again putting pressure on U.S. offtakers to cancel cargoes.
Moreover, Raymond James said in a recent analysis that it expects LNG markets to remain around 2 Bcf/d oversupplied next year. That compares to roughly a 4-5 Bcf/d oversupply during the market’s low point this summer, according to Raymond James.
“Thus, while early 2021 looks better than that of 2020, the market is still likely to see increased seasonal volatility, in our view. Summer 2021 could look similar to 2020 with cargo cancellations as soon as next May,” said the Raymond James team.
In the near-term, warmer weather and stronger pipeline imports are weighing on European natural gas prices, which have declined over the last three days.
“There are no signs that a noticeable weather change is on the way, so gas demand could very well remain low throughout the rest of 2020,” said trading firm Energi Danmark in a note on Thursday.
Meanwhile, in Asia, a surge in Covid-19 cases in Japan, particularly in Tokyo, was likely partly to blame for this week’s steady decline in the front-month JKM price. In the United States, milder weather was also hanging on Henry Hub futures Thursday.
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