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FEATURE: JKM spike again shows extent of gas exposure to winter uncertainty

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FEATURE: JKM spike again shows extent of gas exposure to winter uncertainty

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Gas prices have long been at mercy of cold weather

Previous 'super-spikes' sign of extreme market volatility

Points to lack of preparedness, infrastructure constraints

London — The spike in the JKM spot Asian LNG price this month to a record high took some in the market by surprise, though it is not the first time gas prices have surged unexpectedly, and will surely not be the last.

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There have been a number of "super-spikes" in the global gas market in recent years, mostly on the back of extreme weather coinciding with supply or transportation constraints.

These are more visible than in most other commodity markets, and show the gas market to be particularly vulnerable to unexpected events.

According to analysts, the super-spikes are also evidence that parts of the global gas market remain inadequately prepared to cope with extreme winter demand.

The remarkable rally in the JKM spot price -- from an all-time low of $1.825/MMBtu at the end of April to an all-time high of $32.50/MMBtu in just nine months -- was the result of a perfect storm of high demand, shipping constraints and supply-side issues.

Part of the JKM spike this month was driven by freezing temperatures in northeast Asia, with Beijing suffering its worst cold spell since 1966.

"It shows how poorly prepared we all are -- but particularly Asia and the northeast US -- for extreme cold," gas analyst Jonathan Stern from the Oxford Institute for Energy Studies told S&P Global Platts.

Cold weather also drove prices in the northeastern US to extreme highs in January 2018, the Algonquin citygate price rising to almost $79/MMBtu on Jan. 5 that year, according to S&P Global Platts price assessments.

The Algonquin spike occurred due to a "bomb cyclone" that triggered an extreme cold snap -- which even saw LNG cargoes diverted to Boston that originated at Russia's Yamal LNG facility -- and laid bare network bottlenecks in the region.

European day-ahead gas prices also saw a major price spike on March 1, 2018, on the back of the so-called "Beast from the East" weather system.

The UK NBP was the worst affected -- the day-ahead price spiked to almost $32/MMBtu -- as the cold weather came at the same time as some upstream issues in the North Sea.

"[Price spikes] show how we forget that when the weather is very cold this has an impact on supply as well as demand," Stern said. "Old equipment -- particularly offshore equipment -- becomes less reliable and works less well."

He added that the recent string of mostly warm winters in general "desensitizes us" to the importance of cold weather on gas demand.

Jean-Baptiste Dubreuil, senior gas analyst at the International Energy Agency, agreed that these recent price spikes highlighted that gas is "more temperature-sensitive than other fossil fuels" and that security of supply, flexibility and timeliness remain key.

Logistical 'quirks'

Ira Joseph, head of power and gas at S&P Global Platts Analytics, said infrastructure constraints were also critical in understanding extreme gas price volatility.

"Gas is much more of a transportation-oriented business than oil, which means that logistical quirks can create much more risk," Joseph said.

"Gas is both hard and more expensive to move than oil and it's hard and more expensive to store than oil," he said.

In the case of the JKM -- which collapsed in summer 2020 only to spike in January -- the lack of seasonal storage in the region where most of the incremental growth occurred was the biggest issue.

"It's precisely why you can have 177 US cargoes cancelled in the same calendar year that prices shot into double digits," Joseph said. "Too little storage availability in summer; not enough storage access in winter."

The IEA's Dubreuil also pointed to storage -- or lack thereof -- as a key issue.

"When gas supply is imported, the role of infrastructure such as storages is of primary importance to ensure timely flexibility against unforeseen supply and demand variations," he said.

Dubreuil said any absence of storage capacity needs to be replaced by imported flexibility (pipeline or LNG) and demand response such as fuel switching capability.

Some may think storage is a luxury and that the ultimate function of the global market -- where gas is drawn to the highest-priced points -- is sufficient to ensure supply ends up where it is most needed.

Stern said some countries now rely on market mechanisms rather than "insurance infrastructure" to deal with extreme conditions.

"So instead of saying: 'we should have built more storage to protect ourselves from very high prices', we now say 'look, the market is working'."

Europe enjoys a relatively high storage capacity, but shocks can happen when things go wrong, such as the 40% spike in UK gas prices on the back of the fire at the offshore Rough facility in February 2006.

LNG congestion

Gas is also vulnerable to interruptions as so much of it is transported by pipeline.

The Italian PSV day-ahead price rose to $27.50/MMBtu after an explosion on pipeline infrastructure at the Baumgarten hub in Austria on Dec. 12, 2017, meaning gas supplies were temporarily interrupted to Italy at the height of winter.

The PSV also spiked during the Beast from the East cold snap, hitting almost $23/MMBtu on Mar. 1, 2018.

LNG is to some extent spared from such "black swan" events, though the recent congestion in the Panama Canal -- and its impact on US LNG exports -- shows it can also suffer in the midstream.

"The Panama Canal issue was LNG's first real moment of midstream crisis that would be analogous to what happens often in the pipeline business," Joseph said.

"Peak weather related demand does not allow for enough gas to reach end-users, even after factoring in withdrawals from downstream storage facilities," he said.

Stern also said that while the flexibility offered by LNG is a positive, cargoes can take days to arrive.

"If the weather has not been correctly anticipated then the reaction is even more extreme because some other market may be willing to pay a higher price," Stern said.