Page 8 - GLNG Week 49 2022

GLNG COMMENTARY GLNG

leave the region vulnerable next winter. new benchmark is not going to solve the issue of
In order to get through the 2023/24 win- bottlenecks in European gas infrastructure. TTF
ter comfortably, we will have to see continued is trading at a premium to LNG prices because
demand destruction once again. This will have of the bottlenecks in LNG regasification capacity
to be either a result of market forces (prices and pipeline infrastructure. At the end of the day,
needing to trade higher to reduce demand) or the only viable long-term solution for Europe is
EU-mandated demand cuts (the 15% voluntary increasing supply and removing some of the bot-
demand cut at the moment ends in March 2023). tlenecks facing the industry.
While Europe should be able to scrape through
the 2023/24 winter if current Russian gas flows US natural gas market more comfortable
continue, it is much more challenging if remain- The US natural gas market this year has also seen
ing Russian gas flows come to a full stop. significant strength, trading to multi-year highs.
Strong global LNG prices, stronger demand
Therefore we believe that there is an upside from the power sector and below-average inven-
to current 2023 forward values, particularly tories have all proved bullish for Henry Hub.
those towards the end of 2023, although much However, the outlook for US gas prices is more
will depend on how much storage the EU draws bearish. US dry gas production is expected to hit
down this winter, which obviously will depend record levels next year, growing by a little more
on heating demand through the peak of winter. than 1.6 bcf per day to average almost 99.7 bcf
per day over 2023, whilst finishing 2023 with
EU intervention will not solve the underly- output in excess of 100 bcf per day. In addition,
ing issues this year saw stronger demand from the power
EU member countries have been working on sector over the summer, which pushed overall
policies to try to soften the hit from higher natu- gas demand higher this year. Expectations are
ral gas prices. These include joint gas purchases, that domestic demand will fall back towards
temporarily capping the TTF natural gas bench- more normal levels. Meanwhile, on the export
mark, and the setting up of a new LNG bench- side, whilst there is more LNG capacity set to
mark, which the Commission believes will be a start up over the course of the year, this is fairly
better reflection of actual prices. limited. LNG exports are expected to average a
However, how effective these measures will little over 12.3 bcf per day in 2023, up from an
be is still questionable. Capping the TTF bench- estimated 10.8 bcf per day in 2022.
mark increases the risk that we see more of the As a result, over the course of 2023, we should
trade moving to the over-the-counter market, see US natural gas inventories moving from
which will be excluded from the cap. This in turn below their five-year average to above it ahead of
would diminish liquidity on European natural the next heating season. In fact, the US could go
gas exchanges and also reduce transparency in into the 2023/24 winter with storage at its high-
these markets. It appears as though the Com- est levels since 2020. Therefore, we expect Henry
mission will set this cap well above the market, Hub to trade lower in 2023 relative to 2022. ™
which suggests that they only want to cap prices
in an extreme situation, where high prices (sim- Warren Patterson is the head of commod-
ilar to levels seen in August) are sustained. Fur- ities strategy at ING. This note first appeared
thermore, the longer-term goal of setting up a on ING’s THINK.ING portal.

P8 www. NEWSBASE .com Week 49 08•December•2022