European Union (EU) natural gas storage inventories are trending below the 5-year average, setting the stage for a potential boost for U.S. exporters in the coming weeks and months.
“Low EU gas stocks are good news for U.S. LNG exporters, notably as U.S. LNG netbacks are relatively high for both Asia and Europe, which should support a high level of U.S. LNG exports this summer,” said Julien Hoarau, head of Engie EnergyScan.
As of Monday, there were 361 TWh of natural gas in storage in the EU, equivalent to 32.5% of the region’s capacity, according to NGI data. That is almost 270 TWh below year-ago levels, and 47.3 TWh below the 5-year average.
The low amount of gas in storage is largely due to LNG exports being diverted away from Europe to Asia as the Japan Korea Marker (JKM) benchmark hit record highs in January, experts said. But the low inventories are also not surprising, said Wood Mackenzie’s Murray Douglas, research director of European Gas & LNG.
“I would say 33%, for this point in the year is pretty normal, it’s nothing to get too concerned about,” Douglas told NGI. He added that withdrawals, which had been strong in the first few weeks of 2021, had started to decline in February.
He added that storage appears low given how high last year’s inventories were.
“We obviously have to remember that 2020 was a sort of completely exceptional year for storage,” Douglas said, noting that global demand softened because of lockdowns and other restrictions put in place due to the Covid-19 pandemic.
Nevertheless, the current storage situation will play an important role in this summer’s balance, said James Waddell, senior global gas analyst at Energy Aspects. The consultancy expects inventories to be down year/year at around 24 billion cubic meters by the end of March.
“Europe will need strong injections to get to a decent level of storage adequacy by end-October,” Waddell told NGI. Energy Aspects expects Dutch Title Transfer Facility (TTF) prices to go up, making natural gas less competitive in the power sector and preserving more supply for injections. “In contrast to the current winter, we are expecting lots of LNG supply to come back to Europe this summer to record levels.”
Wood Mackenzie sees the TTF benchmark for the summer holding at around $6.00/MMBtu, with winter at about $7.00. That narrow spread may not incentivize refilling higher-cost storage right away, Douglas said.
“That’s a bit of a problem,” he said. “So that’s one of the reasons why we think summer prices need to cool off, to open up that summer-winter spread which is needed to incentivize storage.”
Douglas added that the lower summer TTF price forecast is still clearing U.S. LNG economics, with American cargoes in the money at the current strip. That makes a repeat of last summer — when up to 200 U.S. LNG cargoes were canceled as demand waned and prices fell — unlikely.
“There should be adequate space in the markets,” Douglas said. “And if you start to see any difficulties, of course, offtakers will start to drop those volumes into the European market. And that would help to kind of bring down your European summer prices.”
Other analysts expect a “significant” boost in LNG deliveries to Europe in the coming weeks and months. The projected increase is driven by Asian LNG demand entering the shoulder season, arbitrage margins currently favoring Europe for Atlantic Basin cargoes, and European storage sites switching to injection mode, Hoarau said.
“In terms of pricing, we see that European gas prices are currently trading much above the delivery price of U.S. LNG compared to a year ago and at the bottom of the coal-to-gas switching range,” Hoarau told NGI. “This means that this summer the balancing will occur mostly on the demand side with potentially higher gas prices to incentivize more gas-to-coal switching in the power generation sector to reduce demand in case of a tightening in supply fundamentals.”
Goldman Sachs also expects to see a “rebalancing” between the Atlantic and Pacific basins following recent declines in JKM prices. The investment bank recently said the process has already started, with LNG loadings marked for Asia “significantly down” from earlier this year.
“To be sure, our balances suggest global LNG markets remain oversupplied this year, with a relatively high level of residual supply to be delivered in Europe,’ Goldman Sachs said recently in a note. “This is especially the case given the normalization of U.S. LNG exports, which have already fully recovered from freeze-off disruptions in February and remain priced to operate near capacity throughout 2021 and beyond.”
Goldman Sachs expects the oversupply to be much smaller compared to last year, however, as it forecasts 23 mmty higher demand in Asia supported by a widespread economic recovery from the pandemic. The investment bank is projecting a JKM price of $7.20/MMBtu this summer, implying a 90-cent premium to TTF.
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