European gas markets were rocked by extreme winter weather in late February, as some hubs saw prices driven to record-high levels by arctic temperatures. Coming at the tail end of a winter already characterized by robust demand, Mel Sawaryn, lead analyst, S&P Global Platts Analytics, says the market hasseen storage stocks approach record lows. This has left European hubs highly volatile; prices surging once again with a colder outlook for the second half of March.
In spite of its bullish fundamentals, the market at the end of February and early March still balanced, highlighting its access to flexibility of supplies and demand. However, the price spike also highlighted the region’s exposure to dynamics in the LNG market.
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Video Transcript
Record-low European storage stocks inject volatility to winter gas, LNG prices
By Mel Sawaryn, lead analyst, S&P Global Platts Analytics
Welcome to The Snapshot, a series examining the forces shaping and driving global commodities markets today.
European gas markets were rocked by extreme winter weather in late February, as some hubs saw prices driven to record high levels by arctic temperatures. Coming at the tail end of a winter already characterized by robust demand, we have seen storage stocks approach record lows. This has left European hubs highly volatile; prices surging once again with a colder outlook for the second half of March.
In spite of its bullish fundamentals, the market at the end of February and early March still balanced, highlighting its access to flexibility of supplies and demand. However, the price spike also highlighted the region’s exposure to dynamics in the LNG market.
North East Asian LNG importers are comparatively constrained in their gas market flexibility to respond to, say, higher than normal winter demand. This is a key reason why we see North East Asian LNG prices breakaway from European hub prices to the upside. This winter, a number of factors contributed to an increase in JKM contracts for February and March 18. These included consistently colder than normal temperatures in Q4 and January in both Japan and South Korea, nuclear generation outages in South Korea, as well as exceptional LNG demand growth into China on the back of the Clean Air Initiative in Northern provinces in 2017. The spread between the NE Asian LNG price and the North West European hub prices rose to its highest level since 2014.
A spread like this can divert marginal spot volumes away from Europe and incentivizes reloads from European terminals to be sent east. Although LNG to Western Europe had been up y-o-y, deliveries to the demand centers in NWE remained subdued. February saw the situation tighten further with both lower LNG imports and higher re-exports.
LNG in storage was thus called upon to maintain sendouts to the grid, and provided supply relief to the market during the demand spike. Across the markets, stocks of LNG hit record lows in the first week of March.
The heavy draw on both LNG and underground gas storages in Q1 so far will increase the region’s pull on the global LNG balance during the remainder of March and into Q2. Already this extra injection demand is feeding through to the summer contracts, with evidence of North West European hub prices pulling back on a firm JKM April price. There is, however, a few weeks of the heating season still left to go and until then we can expect for low storage stocks to manifest in higher volatility in prices during the balance of winter.
Until next time on The Snapshot – we’ll be keeping an eye on the markets.