TTF front-month falls further; coronavirus uncertainties, JKM record low suppress gas prices

London — Unprecedented uncertainties triggered by the coronavirus outbreak, oil futures hitting a 17 year low, and the JKM at record lows sent the TTF front-month contract to an all-time low, leaving traders ponder on how much lower prices can fall.

"We are now moving into the realms of market psychology which may have little to do with the underlying economics whether long run or short run marginal costs. I suspect the prices are reacting to the enormous uncertainty surrounding demand as a result of the lockdowns from the coronavirus. There are 'desperate sellers in search of brave buyers'," Oxford Institute Senior Research Fellow Mike Fulwood said.

The key Dutch TTF front-month April contract has fallen to an all-time low (since S&P Global Platts started assessing the contract in 2004) of Eur7.15/MWh on Friday and extended its descent Monday, trading at Eur6.95/MWh Monday morning, S&P Global Platts and ICE data showed.

Despite prices hitting record lows, demand remains timid and a warming of temperatures is expected to leave the market unable to absorb the surplus leaving room for further bearish market momentum.

"I think it can go further down. Momentum is still strong, and demand is disappearing. Storages high, LNG keep coming and outages are delayed. So it looks very weak indeed, but the downside is getting limited as well. And with oil prices so low.... the curve will follow the downward spiral as well. Hard to say when and where it will turn. SRMC should be in the region 5 - 6. So I doubt it will fall below that," a Germany-based gas trader said.

The Dutch TTF natural gas contracts now seem to be in levels on par with key suppliers' marginal costs for sending gas to Europe.

"Prior to assuming a major global demand impact from coronavirus and the collapse in oil pricing we were forecasting short-run costs for both Russian pipeline flows and US LNG to Europe around these levels (Eur7/MWh -7.5/MWh). Russian short-run marginal costs are now falling however as taxes on production and export are linked (with 3 month lag) to oil products," Platts Analytics Gas Manager James Huckstepp said.

"Basically, as I see it: We are in uncharted territory and it is likely untenable for the market to stay here for long. However, with the corona demand destruction up ahead and no one willing to blink yet, we could remain here for a while in the summer. I see further downside from here as limited to about Eur1. At that point, I would expect a response from either Norway, Russia or LNG players. In principle, marginal cost calculations for players with a lot of infrastructure in place, i.e. Norway and Russia, is always hard, but I do believe that Russia has a higher marginal cost than Norway. On the other hand, Russia also has more of a political will to sit out unprofitable period for long-term positioning, so it's unclear to me who will act first," a second Germany-based gas trader said.

Some traders suspect there could soon be some turndown in gas production. "Let's see whether we get a Troll turn down in the coming days or production cut on Mallnow or Velke Kapusany," a Czech gas trader said.

"If the Norwegians and Russians on gas play the same game as the Russians and Saudies on oil they can just force the expensive producers out of the market," a Dutch gas trader said.

"Though, I imagine most of their production is sold under long term contracts, so the question is at which point do they decide instead of producing to rather buy back the volumes from the market, will not be exactly at marginal cost but should be below to justify potential additional costs with shutting down the production," the Czech trader added.

Part of the resistance levels could too come from the storage costs, Fulwood argues.

"While storage is at historically high levels, there is still room in Q2 for the surge of supply to be put into storage and if you can buy at Eur7/MWh or around that and then sell at Eur10/Mwh or above in Q4 there may well be a margin there to cover the costs of storage. The resistance levels therefore may come when there is sufficient spread to cover the costs of storage based on the forward curves," Fulwood said.

JKM at record low

While European pipeline gas supplies, storage costs start to see resistance levels the volume of LNG directed to Europe will continue to dictate some of the fundamental price levels of the Dutch TTF gas market.

The S&P Global Platts DES Northwest Europe assessment fell to $1.987/MMBtu Friday, down $0.136/MMBtu on-day and the lowest level ever recorded since Platts began assessing this market in 2010. The DES Mediterranean market was also assessed at the same level at Northwest Europe, also a record low.

"Northwest Europe has come back in fashion this week," said a London-based LNG trader, having seen weeks of inactivity. The source said with a closed arbitrage to Asia, Atlantic sellers have had to advertise volume into Europe.

The source said offers were heard in number from US and Russian suppliers.

With no sign of respite regarding the bearish fundamentals of the market, sources continue to question when off-takers will start to cancel US LNG cargoes, with shut-ins growing more likely by the day over Q3.

"The possibility of cancellations is a lot stronger now, and the next cycle is when we could see a lot of them happening," said the LNG trader.

Though several cargoes remain locked in for some time which will continue to exercise pressure on contracts.

"Volumes of US LNG are already locked in towards Europe through May, and we remain bearish TTF Q3-20 in particular when we need lower prices to significantly drive down US LNG exports," Huckstepp said.

"You are looking at the supply side really to create a rebound specifically shut ins however there are chartering contracts to take into account for LNG producers as well as the cost for field operations to slow down therefore it is hard to see. Also every time you think there is no demand side stimulus to force prices lower you hear of FM in India and potentially Pakistan so hard to see where demand side support for LNG in particular is going to come from," a UK-based gas trader said.