Market Drivers – August 2024
Bearish Drivers
· Storages refilling on track to be full ahead of the start of heating season.
· Continued weak power sector demand, exacerbated by forward curve above the minimum CSP.
· Further weakness in the Eurozone manufacturing sector.
Bullish Drivers
· Extensions to planned NCS works slowing injections rates, notably Karsto.
· Despite both sides seeming intent on keeping the gas flowing, damaged infrastructure at Sudzha remains an elevated risk.
· Middle East geopolitical uncertainty.
Market prices throughout August rose in its most significant rise seen during 2024. This was caused by two main factors; geopolitical Risks: There’s a risk premium in the market due to escalating tensions in the Middle East, with concerns about a possible retaliatory strike on Israel from Iran. Additionally, in the Kursk region of Russia, a surprise Ukrainian incursion has raised fears about the security of the gas supply. This incursion included the capture of the Sudzha metering station, a critical transit point for Russian gas flowing into Europe. Although gas has continued to flow since the station was seized last Thursday, there’s growing concern about potential damage to the infrastructure, which could halt the flow. Despite one administrative building being destroyed, the pipelines remain intact. The news of this situation caused gas prices to spike to fresh yearly highs. The loss of approximately 42 million cubic meters per day of gas would hinder storage restocking and force buyers to enter the spot market to replace these volumes.
Fundamentally, the UK market has been relatively loose, with low consumption and strong renewable generation allowing for storage injections and exports to balance the system. Before these geopolitical tensions, prices were averaging around 75p/th in July; now, they have risen to 94p/th, reflecting market concerns about the risks ahead.
Global Impact: Similar to other global markets, the JKM (Japan-Korea Marker) has increased by 8% in August, driven by the escalating tensions in the Middle East and unexpected developments in Ukraine, which have led Asian prices to follow European trends. JKM prices were averaging $12.37/MMBtu in July and early August but have now reached yearly highs of $14/MMBtu for the M+2 price. Some of this increase is also due to higher temperatures in Japan and South Korea, which have reduced storage levels and increased spot demand. However, this demand is somewhat tempered by the current high prices, which are discouraging purchases from price-sensitive buyers in China and India.
In September, we don’t expect much downside potential from a fundamental perspective until later in the month, primarily due to reduced supply caused by extensive NCS maintenance, which is slowing down storage injections. The main bullish concerns revolve around ongoing uncertainty regarding Russian gas flows through Ukraine and escalating tensions in the Middle East.
On the supply side, Norwegian production is forecasted at 230 million cubic meters per day (mcm/d), which is 99 mcm/d lower than the previous month due to significant maintenance.
Weekly Market View – w/c 12th August, 2024
Weekly Market View – w/c 5th August, 2024
Market Drivers – July 2024
Bearish Drivers
· Continued soft residential and gas for power consumption.
· Strong production in Norway, particularly, considering possibly Troll’s maximized output.
· Robust storage refilling trajectory.
Bullish Drivers
· Unplanned events impacting global LNG supply, potential hurricanes are a notable concern.
· Norwegian maintenance extensions or unplanned events.
· Additional UKCS domestic production outages.
In July, prices have generally been declining, with occasional volatility due to Hurricane Beryl’s impact on Freeport. Bearish fundamentals, such as increased Norwegian supply and weak demand, have supported ongoing storage replenishment.
In August, fundamentals are expected to be bearish and should continue to drive a steady decline in prices. Demand remains relatively soft, with UK domestic demand slightly lower month-on-month and stable compared to August 2023. Gas demand for power generation is weak in both the UK and Northwest Europe (NWE), largely due to strong renewable energy production, increased hydropower, and higher availability of French and UK nuclear power. Overall, NWE gas consumption is expected to be over 100 GWh/day lower than in August 2023, with only a slight year-on-year increase in industrial consumption.
On the supply side, Norwegian production is forecasted to decrease month-on-month, following a strong output of 335 mcm/day in July due to minimal maintenance. Planned maintenance will resume in mid-August, leading to a decline to 302 mcm/day, though this remains higher than the 285 mcm/day recorded in August 2023. Strong UK exports to the Continent (48 mcm/day) are expected to continue due to an oversupplied UK system, with the NBP maintaining a discount to the TTF of around 5p/th.
LNG sendout remains low as European storage levels are comfortable, and Asia continues to dominate demand due to heat waves, increased renewable energy, low LNG prices, and higher coal capacity, reducing demand from China and Japan. Despite higher regasification capacity in NWE, no increase in LNG sendout is forecast for next month. August’s NWE LNG sendout is expected to be slightly lower than July and 36 mcm/day below August 2023 levels.
Based on updated balances, August storage injections are projected to remain steady compared to July, slightly surpassing last August’s rate. Storages are expected to end August at 519 TWh (92%), 18 TWh below last year. If mild conditions prevail, NWE stocks could reach 100% fullness by November 1. However, there is still a bullish price risk for WIN-24, with a potential for storages to end the upcoming heating season at 18% fullness.
In the short term, risks include unplanned maintenance in Norway and the UK or any events impacting global LNG supply, which could disrupt the storage refilling process. Prices are expected to hover around €30/MWh, remaining sensitive to changes in supply and demand fundamentals until storage approaches full capacity.