08 Apr 2024 | 12:27 UTC

Underwhelming winter period spells disappointment for European heating markets

Highlights

US LPG exports flooded European market despite muted heating, petchem demand

LNG, gas bears outmatched the bulls throughout the winter heating season

Uncertainty for next winter limiting contango for NWE LPG, LNG

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After another underwhelming heating season, Europe has entered its restocking phase with heating commodities still haunted by the bears of the market despite buyers in the region looking to replenish supply ahead of next winter.

With the heating season ended, and buyers across Europe looking to replenish supply in the heating markets, prices are still under pressure at the start of the second quarter given the LPG and LNG markets exited the heating season with an abundance of supply versus demand.

In the LPG market, while some pockets of demand pushed up prices in October, values in the larger vessel markets this year have remained under pressure amid milder temperatures and robust product flows from the US.

The CIF NWE propane large cargo market reached $525.25/mt on Oct. 20, $240.25/mt below peak values recorded the previous heating season at $765.50/mt in January 2022, according to assessments by Platts, part of S&P Global Commodity Insights.

Similarly, in the coaster market, FOB Seagoing coasters fluctuated throughout the year, with no clear upward strength observed in Europe. The FOB seagoing market spiked at $663/mt on Oct. 27, but in the previous heating season they peaked at $771/mt in January, S&P Global data showed.

Despite the overall muted tone, prices in the inland propane market have bucked wider market trends as high premiums persisted throughout the winter season amid an emergent trend of diverging propane markets.

The European market continues to adjust to milder winter temperatures, with a new trend of weaker prices during peak season turning sentiment bearish. Last year, the market experienced above-average temperatures throughout the heating season before the seasons shifted, with colder temperatures arriving in late March to April. However, temperatures in the short term are expected to remain above average providing little support into the second quarter.

Strong US production remains a focal point in the market, with output there climbing to near record highs and subsequently seeing US LPG exports continue to flood the European market.

"Propane prices remained quite stable with no additional demand from heating sector," analysts at S&P Global said.

The NWE propane large cargoes sat at $529.50/mt on April 5, with the FOB seagoing coasters assessed at a $60.5/mt premium to cargoes.

Cooled LNG, gas demand

Similarly, the LNG market has experienced bearish headwinds over the 2023-24 heating season. Having begun the winter heating season at 96% full, EU storages quickly reached a high fill point of 99.63% full of Nov. 6 according to Gas Infrastructure Europe data. Stocks were at 58.34% full by the end of the winter season on March 31.

"The EU have obliged everyone to fill up their storages, and it has not been a normal winter, it has been very mild," an LNG trader said. "Everyone [was] much more comfortably whether they [were] long or short."

Buying interest throughout the heating season remained depressed from the residential and commercial sectors. Weak economic and industrial signals from Europe also depressed demand.

Platts assessed the May contract on the Northwest European marker at $8.323/MMBtu and the Dutch TTF month-ahead price at Eur26.745/MWh on April 5.

During the October-March Winter 2023 season NWE LNG prices peaked at $16.877/MMBtu on Oct. 23 and prices hit a low of $6.807/MMBtu on Feb. 22.

Comparatively, in the 2022-23 winter season, NWE LNG prices peaked at $37.704/MMBtu on Dec. 15 and hit a trough of $11.226/MMBtu on March 20.

Although 2023 saw residential, commercial and industrial demand in Europe drop by 6%-7% year on year, demand in 2024 is expected to partially recover, with residential and commercial demand increasing by 4 Bcm and industrial consumption growing by 11 Bcm, offset by a 5 Bcm reduction in gas consumed in power and heat generation, according to data from S&P Global.

Summer dynamics

Although typical demand for LPG, LNG and natural gas has come to an end, restocking requirements over summer may help to provide some support ahead of next winter. However, uncertainty still looms across next winter for the heating markets.

Traders are seeing a flat structure for both the LPG and LNG forward curves, with the contango further down the curve still limiting buying interest ahead of next winter.

"Despite falling demand and a production recovery, the Gulf Coast propane price did not decline significantly, as an expected heating demand rebound, and the reopening of the trans-Pacific arbitrage window provided support," analysts at S&P Global said. "However, the price may face stronger downward pressure once stock levels begin to climb in early April."

Similarly, with the US arbitrage widening to the Pacific, LNG prices may see support over the injection season as Europe prices higher in a bid to compete with Asia for volumes.

Europe is also expected to face steep competition on the LNG front; imports into Europe in March already fell 14% month on month, according to S&P Global data. LNG imports into the EU27+UK are expected to fall 4.8 Bcm year on year as Asian demand growth outpaces new supply entering the market, the S&P Global report said.