From S&P Global Platts, January 11:
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Bullish markets characterized many commodities in the first week of 2021, not least LNG, which opens this week's bumper selection of trends. There is also upside for EU carbon prices, container rates and European steel mill margins, while US economic data suggests there is room for more oil-based hedging against inflation.
1. Japan winter freeze adds support to LNG spot prices
What's happening? Colder weather has been supporting power demand and heating needs in Japan, with recent daily power demand about 15% above year ago levels, while lower nuclear generation is creating shortages in the western grid. Japanese LNG buyers are not selling back their relatively inexpensive sub-$10/MMBtu contract volumes into the JKM spot market despite ample financial opportunity to do so, with spark spreads in the country, more profitable than the potential resale into the LNG market. A palpable fear of a short LNG supply situation is also playing into fears of reselling and being left short. Japan has not bought any spot LNG for some time, relying on its contract volumes to balance.
What's next? While weather will continue to remain an important driver, the power situation in western Japan should improve next month. Three nuclear plants are expected back by mid-February, which should alleviate supply concerns, but forward power prices for February remain particularly elevated, providing an incentive to use LNG in the Japan power market. S&P Global Platts Analytics believes coal-fired generation is already highly utilized, while recent coal import data does not show much increase in spot shipments; but Japan still has a large amount of idle oil capacity that can be turned on.
2. Haynesville adds rigs but wider US shale gas slump persists
What's happening? In January, natural gas production from the Haynesville shale is averaging over 13 Bcf/d, or its highest in eight months. As output from most US shale basins continues to stagnate, operators in the Haynesville have been gearing for growth, adding 10 rigs in the fourth quarter, and making it the only US shale play to have fully restored its drilling fleet to pre-pandemic levels.
What's next? The surge in Haynesville production comes as total US gas supply remains in a slump that's forecast to continue until early 2022, according to S&P Global Platts Analytics. In January, total US gas production has averaged just 90.7 Bcf/d—down more than 5 Bcf/d from its prior record high—as output from associated plays like the Permian, the Eagle Ford and the Bakken has continued to stagnate. While mild weather and elevated storage volumes this winter have dampened the outlook for prices since late October, a modest recovery in the forward market has taken hold recently, pushing the 2021 Henry Hub curve to $2.80/MMBtu—up about 13% from its recent low....
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