Global Gas Winter Outlook and Forecast Update

After a difficult 2020, global gas benchmarks have rallied hard ahead of winter. In the US ‘source’ market : The global gas market’s marginal molecule is becoming increasingly expensive. Taking our view of forward supply and demand, US winter balances are 8.7bcf/d tighter year-on-year , the equivalent of 1.57tcf . With producers likely to struggle to ramp up production in the short-run, balancing is likely to be required on the demand side, although the magnitude is limited with gas increasingly baseload in the power mix. We expect Henry Hub to average $3.18/MMBtu over the winter period. In the Asian ‘sink’ market: LNG import growth is seen above supply growth this winter, with the global LNG balance subsequently tightening ~4bcm year-on-year . Our key assumption for the Asian market is that the Chinese call-on-flexible gas will be largely met by deferred pipeline flows , which we expect to ramp up 5.7bcm, or 24.2% year-on-year over the winter period. We subsequently expect a limited differential between contractual supply and LNG import requirements in the region which, along with increasing LNG terminal utilisation rates, will limit demand for spot cargos and ease upside pressure on JKM prices. We expect JKM to average $5.55/MMBtu over winter. In the European ‘balancing’ market: The current TTF curve is pricing on all supply to the European market, with forwards above key levels below which supply is optimised. Barring a cold winter, our modelling suggests storage will exit winter near last year’s carryout. We therefore expect prices to move below several key triggers to attempt to limit supply and encourage consumption across the continent, with the re-routing of destination flexible LNG and additional coal- to- gas switching incentivised. We expect TTF to average $4.51/MMBtu over winter. The contrast between the outlook for Henry Hub and TTF has important implications. With the European market likely to be pricing off supply and US dry gas production struggling to ramp up robustly, both markets are likely to require US cargo cancellations to balance. Gas hub convergence is thus our base case next summer. We see Henry Hub averaging $2.90/MMBtu over summer, with TTF pricing at $3.20/MMBtu. Whilst our Henry Hub view is aligned with the current summer strip, we are strongly bearish the current TTF curve.