Surging LNG Imports Will Not Blunt European Gas Prices

Despite entering winter at a significant deficit to the five-year minimum, NW European gas inventory levels have recovered back within the five-year range in recent weeks. Inventory levels have been supported by record-high LNG receipts, which have offset low Russian flows (which are currently being held at long-term contracted levels, with Gazprom exiting the spot market). European LNG receipts typically dip towards the end of the second-quarter and into the third quarter. Whilst typical seasonal demand patterns will emerge over the summer, high prices and availability of substitutes (most notably in Brazil, which has exhibited significant counter-seasonal demand growth in recent years) will see European LNG imports trending well above the five-year range this summer. However, im port levels will likely ease from recent highs as competition for sport cargos ramps up in the coming months alongside reduced supply availability as terminals undergo maintenance The need to keep a bid for marginal spot and short-term LNG molecules over summer will support TTF prices, despite a healthier inventory picture. Indeed, the utility of relying on the past statistical relationship between inventory deficits to five-year average levels and price is limited in the current environment. Natural gas markets are inherently non-stationary, and Europe’s requirement to move up the global gas supply curve (from cheap Russian term volumes to pricing off international consumers for marginal LNG) implies a higher TTF price is now required to ensure an adequate inventory fill rate. We maintain our price forecast, remaining bullish on the 2023 curve given our expectations for the conti nued need to price for industrial demand destruction and marginal LNG molecules , well into 2023. TTF is expected to average € 100/MWh in 2022 and € 85/MWh in 2023.