Global LNG market still remains 'fragile' ahead of winter: analysts, traders

The global LNG market is bracing for a potentially strong winter this year into early 2025 as bullish signals from the waterborne cargo market and vulnerability to supply side shocks heighten sentiment, according to traders and analysts at S&P Global Commodity Insights.

Prices have cooled since the record highs seen post Russia's invasion on Ukraine as Europe's rapid build out in LNG infrastructure and increasing supply in the global LNG arena helped to subdue market volatility.

Platts, a part of Commodity Insights, assessed the Northwest European marker for October at $12.438/MMBtu on Aug. 29 while the JKM – the benchmark price for delivering cargoes into Northeast Asia – was assessed at $14.044/MMBtu.

NWE prices have cooled since the record high of $74.486/MMBtu on Aug. 26, 2022, while JKM has cooled since the record high of $84.762/MMBtu on March 7, 2022, however, bullish signals are looming in the current market, sources said.

Several bullish signals in the global waterborne market are expected to keep prices relatively heightened in the near-term into winter despite the underlying bearish fundamentals, with traders seeing sentiment driving price moves more than fundamentals currently.

"In my view, the current balance in the market is very fragile and it will continue to be in the winter, Asian buyers didn't even start to fill up their inventories - temperatures are still high, Egypt took away significant chunk of supply from Europe, South America may take some extra cargos in Q4, Q1 as well," Alija Bajramovic, senior research analyst for European and Russian LNG, at Commodity Insights said. "Although things aren't bad as they used to be - we have full storages, French nuclear is back, demand for gas in power generation is very low - Europe will still be living on the prayer despite that - one serious cold spell can really affect things."

Bullish LNG

The likely expiry of the Russia-Ukraine agreement has added to the bullishness in the global market. Although the likely expire has been already been priced in, traders have said that the gas supply could be cut before the end of the year.

Russian gas flows via Ukraine have been steady at around 42 million cu m/d so far in 2024. Europe will look to LNG to replace these lost volumes, which will intensify global competition during winter for seaborne cargoes.

This is evident further down the curve. The Russian-Ukraine agreement is likely to expire in January 2025.

The strongest spread between Europe and Asia throughout the Platts Northwest European forward curve – that prices 11 months out – stands on the January-2025 derivative.

Platts assessed the JKM-NWE differential at $1.674/MMBtu, the strongest premium for JKM versus NWE throughout the forward curve.

Trading analysts suggest that Asian buyers "do not want to be caught short," in early 2025 and have taken a longer position to compete with Europe for cargoes.

Further adding to the strong outlook for next year, is hedge fund's net-long position in the European natural gas and LNG markets.

According to the latest Commitment of Trade report from the Intercontinental Exchange, hedge fund's net-long position decreased around 1% week on week from the multi-year high but their total positions still accounted for 22% of total European natural gas futures positions.

Their growing presence in the European futures markets coupled with expected tightness from the expiry of the Russia-Ukraine agreement and delayed LNG supply startups has kept the market on the edge of its seat.

Traders have attributed the bullish outlook for the first half of 2025 to continued delays in new liquefaction capacity being met with forecasted growth in global LNG demand.

Several market participants noted that some producers and end-users might be in discussion about advancing cargo deliveries into the 2024 winter season and throughout 2025 for term contracts.

JKM prices could enter a backwardation phase from 2025 to 2026 as more new supplies becomes available in the latter half of 2025.

"Therefore, sellers may find it advantageous to secure term contracts for earlier delivery periods in 2024 and 2025, particularly those linked to Brent pricing," an Asian importer said.

On the other hand, buyers might benefit from securing more cargoes for Q4 2024 and Q1 2025, as spot cargoes could be more expensive than term cargoes during the winter due to potentially tight supply, according to sources.

"Chinese buyers may not be actively negotiating these arrangements, but several buyers have shown interest in them," a source working in Chinese company said.

Meanwhile, other trading sources indicated that South Korean buyers might be engaged in advancing cargo deliveries for the winter season and the first half of 2025.

"Indians are not currently pursuing this, but it will make increasingly more sense to do so if the gap between term contract and spot prices remains large, especially with the expectation that spot prices will decrease in 2025," said an Indian source who added that some fees may be applicable depending on the price spreads in the forward curves for 2024 and 2025, in order to advance cargoes.

Supply-side shocks

Supporting the bears over the bulls in the European gas market was the strong storage levels and healthy access to relatively cheap pipeline volumes versus LNG.

European gas inventories stood at 91.98% full as of Aug. 28, according to Aggregated Gas Storage Inventory data. The EU reached its 90% gas storage target on Aug. 19, some 11 weeks ahead of the EU-mandated Nov. 1 deadline.

At the same time, industrial demand and demand from the residential and commercial sectors across Europe has remained depressed which has further capped buying interest.

Despite the underlying bearish sentiment in the European gas and LNG markets, the global LNG market remains susceptible to supply-side worries with traders seeing the global cargo market as vulnerable to any shocks.

"Things are balanced out, but that balance is precarious - Algeria doesn't seem super reliable and Norway always play a little bit around... Eni moved maintenance of Gela pipeline with Libya from September to October - this implies that things are maybe tighter than they seem - few mmcm/d from Libya matters obviously at the moment," Bajramovic from Commodity Insights said.

European prices rallied earlier this week, "after Russia carried out attacks on Ukrainian energy infrastructure, which included gas compressor stations," Warren Patterson, head of commodities strategy, and Ewa Manthey, commodities strategist, at ING said. "The attacks do not appear to have had an impact on flows to Europe."

With pipeline maintenance in Europe, the market suggests further volatility should Europe face a cold winter this year.

"We've had two mild winters, it's likely we will have a cold winter this year," another trader said.

"In addition, Norwegian gas flows to Europe have started to edge lower as scheduled maintenance work gets underway. The market will be following this maintenance closely and will be sensitive to any overruns," Patterson and Manthey added.

"It's been heard that heavy maintenance is planned at Norwegian gas fields, which could tighten the market, especially if winter begins with colder-than-expected weather, further weakening the market's stability," an Asian source said.