The tight global gas market balance is a major theme running through our pick of commodity market trends this week, as Japan tries to mitigate winter stress on the power system, while Europe's gas and carbon markets experience continued high prices.
1. S&P GSCI indices show gas rise outstrip oil as Europe, Asia support demand
What's happening? Natural gas price, as indicated by the S&P GSCI natural gas subindex, has increasingly outperformed the crude oil subindex. This type of movement is unusual, but not unprecedented, in what is essentially a shoulder month and before heating demand rise in the northern hemisphere. Hurricane Ida outages to both crude and gas in the US have supported the price rise, but will eventually normalize. However, there has been an even sharper rise the other key global gas and LNG benchmarks, the Dutch TTF and Asian JKM, creating additional uplift and support to domestic US gas prices. Lastly, US power demand has remained much stronger than normal, which is pulling natural gas into power generation.
What's next? Can the GSCI natural gas index, which is composed of US natural gas prices, retain its strength? Even after USGC production normalizes, the European and Asian pull on US gas supply is likely to remain supportive until the former two markets see higher supply or demand tempers. Higher Russian flows, which have been abnormally constrained, may begin to provide those additional supplies to Western Europe. However, weather in the early part of the heating season will be another key variable. US and European weather in November 2020 was about 15% warmer than normal, while Japan was 10% warmer. December remained warm in the US (4%) and Europe (10%), while Japan was 5% colder than normal. As such, normal early season weather would be a boost to demand, particularly against pandemic impaired demand in November to December 2020 when a rise in coronavirus cases was again being felt.
2. Japan government, utilities look to shore up winter fuel security
What's happening? Japan's government and power utilities want to learn from the tight supply-demand situation experienced in January 2021 to avoid a repeat scenario. Early this year there were restrictions on gas-fired power generation as a result of robust demand during extreme cold spells, as well as reduced solar power during snow storms. Utilities resorted to boosting crude and fuel oil use for power generation to make up for shortfalls in LNG stocks during peak demand in January.
What's next? The steps taken by the government range from monitoring major power utilities' fuels inventories to making sure Japan has sufficient power supply capacity to meet over 10-year high demand, as the Tokyo area has not secured a required 3% reserve power supply capacity ratio during the peak demand months. The measures taken by some Japanese power utilities include reducing their exposure to spot LNG by increasing short-term supplies as well as changing scheduled maintenance at a nuclear power plant away from the peak winter demand season. Expected greater nuclear output this winter should reduce seasonal fuel requirements and stabilize power supply during snow storms.
3. Record European gas prices sharpen focus on Nord Stream 2
What's happening? Construction of the Nord Stream 2 gas pipeline was fully completed on Sept. 10, with attention now focused on when the Russia-to-Germany pipeline will begin operations. However, Russia's Gazprom said last month the startup of Nord Stream 2 was unlikely to have a significant impact on overall sales in Europe this year. It expects its gas sales in Europe and Turkey (excluding the former USSR states) to be only 183 Bcm in 2021.
What's next? Before Nord Stream 2 can start operations, it requires approval from the German regulator, which could take months to finalize. With European gas prices at record highs—benchmark contracts in Europe are now trading above Eur58/MWh—the availability, or non-availability, of Nord Stream 2 could still play a major role in market dynamics through the upcoming winter.
4. EU carbon price continues to smash records
What's happening? EU carbon prices rallied to an all-time high of Eur63.35/mt ($75.01/mt) Sept. 8, on a combination of unusually high natural gas prices in Europe and bullish sentiment linked to an ongoing tightening of supply in the EU Emissions Trading System. High gas prices are bullish for carbon because they raise the implied coal-to-gas fuel switching price for electricity generation.
What's next? The market will be watching closely for news on gas markets, where storage levels are low in Europe ahead of winter, and with attention on the Nord Stream 2 gas pipeline which could start to supply Russian gas to Europe this year. Any downward move in gas prices could be bearish for carbon prices. Equally, downside may be limited due to the market's awareness that supply of allowances will continue to tighten as the EU seeks to deliver on its 2030 goal to cut emissions by 55% below 1990 levels.
Reporting and analysis by Alan Struth, Takeo Kumagai, Stuart Elliot, and Frank Watson