Analysis-Winter is coming: temperature extremes fuel global gas rally

© Reuters. FILE PHOTO: A liquefied natural gas (LNG) tanker is tugged towards a thermal power station in Futtsu, east of Tokyo, Japan November 13, 2017. REUTERS/Issei Kato/File Photo

By Jessica Jaganathan, Nina Chestney and Scott DiSavino

SINGAPORE (Reuters) - Global gas prices are expected to break records this winter as a hot northern hemisphere summer leaves inventories low in key markets, just as green energy drives ramp up in new regions.

Benchmark Dutch natural gas prices in northwest Europe have surged 80% in the past three months to all-time highs, while spot liquefied natural gas (LNG) in Asia is at an eight-year seasonal high, Reuters data showed.

Traders are betting that average winter prices will surpass last year's peaks, when a deep freeze across north Asia sent LNG soaring more than 200% to record highs.

(Graphics: Global gas prices - https://fingfx.thomsonreuters.com/gfx/ce/zgpomwdjopd/GlobalGasPrices.png)

"Storage levels are quite low in many places as a hot summer has meant that there has not been much chance to replenish stocks, so this could be bullish for winter, especially if it's going to be freezing again," a Singapore-based trader said.

The average price for a December LNG derivatives contract in Northeast Asia is about $17.65 per mmBtu, and around $17.80 per mmBtu for January, a Singapore-based industry source said.

In contrast, last year's December delivered price for physical cargoes averaged about $11.50 per mmBtu, and January's cargoes averaged close to $17 per mmBtu.

(Graphic: Asia LNG spot prices vs swap forward prices - https://fingfx.thomsonreuters.com/gfx/ce/jnvwegolnvw/AsiaSpotLNGvsForwards.png)

East Asia, home to the world's top two LNG importers Japan and China, shipped in 18 million more tonnes in the first seven months of 2021 than over the same period in 2020, Xi Nan, vice president of gas and power markets at Rystad Energy, said.

"Warmer temperature has been the main driver this summer, plus the green energy push in the JKTC (Japan, Korea, Taiwan and China) economies," she added.

Olympic host Japan boosted LNG imports to avoid a power crisis as a result of soaring temperatures, while Chinese firms have been buying cargoes to meet peak demand in southern regions and to stockpile for winter.

INVENTORY LOW

European natural gas prices have also soared, with prices at the Dutch TTF hub jumping 32% in the past month to record highs, fuelled by summer maintenance outages in Norway, low LNG supply, high carbon prices and low gas inventories.

Gas storage in Europe is currently about 50% to 60% full, compared with 80% last summer, analysts said.

(Graphics: Gas stocks in northeast Europe - https://fingfx.thomsonreuters.com/gfx/ce/byvrjoaeove/NEEuropeGasStocks.png)

"There is a real risk of Europe entering the winter season with low inventory levels, suggesting that prices will remain well supported," ING analysts said in a recent note.

Russia's Gazprom (MCX:GAZP) has held off booking additional gas transit capacity to meet demand, which is also adding to upside price risks in Europe, analysts added.

"Russia is now the only country with spare production, but in order to increase exports they would need to book additional capacity through Ukraine, and up to this point they have refrained," James Huckstepp, EMEA gas analyst at S&P Global (NYSE:SPGI) Platts, said. Platts Analytics holds a bullish market outlook for Dutch gas prices until 2023, he added.

U.S. natural gas futures surged to a 31-month high this week, with Timera Energy expecting above-average temperatures until September and storage levels below the five year average. The current futures market forward curve suggests prices will hold above $4 per MMBtu through March 2022.

(Graphics: U.S. natural gas market primed for continued high prices through the coming winter - https://fingfx.thomsonreuters.com/gfx/ce/mypmnmrxxvr/HHubNGPrices.png)

On the supply side, nearly 30 million tonnes of additional LNG production is expected this year, but this will be easily absorbed by the top two consuming regions of Europe and Asia, say analysts.

"The two markets would fight for LNG supply this winter, especially in a cold winter," Rystad Energy's Xi said.