NWE LNG prices seen strengthening ahead of summer on rush to inject stocks

European LNG prices could be in contango going into summer, contrary to historical trends, as the market rushes to restock amid heightened geopolitical uncertainty this year.

DES Northwest Europe prices have typically been in backwardation entering the summer season. The spread between DES NWE prices for March/April averaged $3.143/MMBtu for 2023, $1.108/MMBtu for 2021 and $0.257/MMBtu for 2020. The obvious exception was 2022 when the average spread was minus $12.218/MMBtu, owing to the increased need to secure winter supply following Russia's invasion of Ukraine.

The current market is clouded with bearish fundamentals, driven primarily by above-average temperatures in the region. EU gas inventories are sturdy at 71.13% full as of Jan. 29, according to Aggregated Gas Storage Inventory data.

The market expects to exit the heating season with healthy levels of gas inventories. Nevertheless, some market participants still expect to see a stronger April versus March on the back of strong injection demand along with other bullish factors.

"I think April onwards the demand that comes into Europe is for injection," an Atlantic-based trader said.

Market participants could be drawn to securing LNG for injections sooner rather than later in the summer season, driving prices higher in April. This could be down to a multitude of reasons contributing to the uncertainty in the market. One factor could be the 2024 US elections, the results of which could move the markets considerably.

On Jan. 26, the US administration declared it would pause granting key LNG export licenses until the US Department of Energy could update its process for assessing how new terminals would affect the country's security, economy and climate.

Maintenance works

"The injections might be front loaded because there is so much uncertainty, especially with the [US] election," said another trader.

There is also uncertainty relating to how the Red Sea issue develops over the coming weeks and months. A prolonged diversion around the Cape of Good Hope could push up prices in the Atlantic.

In the past couple weeks, three LNG-laden Qatari carriers that were originally scheduled to arrive at the Suez Canal have been redirected from the Red Sea. Delivering into Europe by circumnavigating the Cape of Good Hope would take an additional 10 days of travel time. However, market participants are skeptical about the viability of this in the longer run.

"In the short term I think they're having to go through [the Cape of Good Hope] but if it lingers on, the market will adapt," said a trading analyst.

The market is also expected to see a greater number of maintenance works in the summer period, which could put supply-side pressure on prices.

The OLT Offshore Toscana LNG facility in Italy announced Jan. 29 that it will be unavailable for business from April to October due to maintenance work.

The duration and extent of this maintenance work could affect market sentiment, as "there were four large companies holding capacity there," a Mediterranean-based trader said.

On the liquefaction side, Freeport LNG expects Train 3 at the Texas export terminal to be offline for about a month due to an electrical issue that hampered the liquefaction unit during the cold snap that afflicted a significant area of the US, the company said Jan. 26.

"I think that Q2 has some upside to it," said another trading analyst. "There's upside risk on Freeport [and] at some points over 300 GWh/d gas losses from Norway which will impact injection balances."

The market can also see the possibility of more pulls from Asia in lieu of low prices, which could press Europe to compete for the marginal cargoes.

"I think Asia will pull and Europe will need to price up to attract LNG," said the first trading analyst.

The current market is being driven by low demand which has cushioned any sudden upward price moves. However, once Europe steps out of the heating season, these individual bullish factors could have a compounding effect on prices.

Platts, part of S&P Global Commodity Insights, assessed March and April NWE LNG forward prices at $8.661/MMBtu and $8.717/MMBtu, respectively Jan. 30, reflecting a 5.6 cents/MMBtu intermonth contango.