Russia for now sits at the heart of global gas markets - its ability to impact pricing and supplies beyond its regional market is becoming clearer and likely to solidify as demand picks up in the winter months.

Following another week of record prices, the market shows no sign of finding a new equilibrium. Market sentiment is a mixture of price record fatigue with quiet acceptance that this new normal is here to stay.

Here is Rystad Energy’s regular gas and LNG note from analyst Lu Ming Pang:

Gas and liquefied natural gas (LNG) prices have surged worldwide, breaking previous record highs set right after the outbreak of conflict in Ukraine in late February.

In Europe, the tumultuous situation surrounding the Nord Stream 1 gas pipeline has again reared its head, with a sudden maintenance announced for the end of August.

This has sent shockwaves through gas supply chains, with prices in Europe, the US and Asia surging to record levels on the news.

Russia for now sits at the heart of global gas markets - its ability to impact pricing and supplies beyond its regional market is becoming clearer and likely to solidify as demand picks up in the winter months.

Following another week of record prices, the market shows no sign of finding a new equilibrium.

Market sentiment is a mixture of price record fatigue with quiet acceptance that this new normal is here to stay.

Europe: Pipeline pain prolonged

TTF prices surged to $83.2 per million British thermal units (MMBtu) on news of the maintenance on Nord Stream 1.

This is an all-time high, with the last record of $77.6 per MMBtu set in March after Russia’s invasion of Ukraine.

This was at a time where the fate of Russian gas supply remained unclear, despite Europe having just scraped through winter with only about 26% in gas storage.

Six months on, there remains little clarity over the security of Russian supplies, with the latest twist seeing Gazprom announce a sudden maintenance on the pipeline from 31 August to 2 September, with gas flow through the facility expected to be at zero throughout the period.

Gazprom has cited that preventive maintenance must be carried out every 1,000 hours according to the specifications given by Siemens Energy, and operations will only resume if no further technical difficulties are identified.

Like the maintenance from 12 July to 21 July, market participants are wary of the possibility that the flows may not return on schedule, if at all.

Three out of a total of eight turbines on the site had earlier been shut down as part of routine operations, where the units are required to be maintained following 34 months of operation.

The last of eight turbines is the one that is currently in operation, which has powered 20% of the total Nord Stream 1 capacity ever since the resumption of services on 21 July.

Five turbines are required to operate the pipeline at 100% capacity, with a sixth acting as a back-up. Since the restart on 21 July, Russian gas flows through Nord Stream 1 have been stable, averaging around 31.14 MMcmd as of 22 August – around the reduced capacity of 20%.

Europe can take some solace from Norwegian flows which remain stable, averaging around 300.78 MMcmd as of 22 August despite maintenance ongoing at the Kollsnes hub and Troll fields, which is expected to end at the turn of September.

Prior to the maintenance, Norwegian gas flows were holding stable at around 330 MMcmd.

Further disruption is expected in September due to maintenance on the Oseberg field (27 MMcmd reduction), and again from the Kollsnes hub (38.5 MMcmd reduction) and Troll fields (33.5 MMcmd reduction).

As compared to last year where the gas storage was at its fullest at 77.2 billion cubic meters (Bcm) on 21 October 2021, European gas storage is already in a healthier position.

Europe has 77.48 Bcm in storage, and is 77.42% full as of 21 August, which is on aggregate close to the European Union (EU) requirement of having storages 80% full by 1 November.

Injections are about 2.67 Bcm week on week, which is in line with the five-year average weekly injection of 2.35 Bcm for August from 2017 to 2021.

Germany, which has set a target of 75% storage by 1 September, has comfortably exceeded the target at 80.14% as of 21 August, and appears on track to hit its 85% target by 1 October.

With Russian gas flows wreaking havoc on the gas market, Europe would be foolish to be lulled into a false sense of security with Russian flows.

The International Energy Agency (IEA) had earlier warned that Russian gas could be cut off at any moment, and the sudden maintenance announced last week for Nord Stream 1 further vindicates that opinion.

Europe continues to push towards weaning itself off Russian supplies by constructing and expanding LNG import facilities.

Unprecedented weather has also pushed the stability of power supplies in Europe into the spotlight. Low levels of water on the Rhine River have disrupted coal and diesel supplies into conventional thermal power plants, also depriving nuclear power plants of adequate water to cool important processes.

Base power prices have risen to €605.13 ($600.69) per megawatt-hour (MWh) in Germany as of 23 August, with surrounding countries such as France and the Netherlands also reporting similar prices.

Extreme weather has also forced Norway to conserve reservoir water levels to guarantee sufficient hydropower for residents in the winter.

Low water levels and hydroelectricity production in Norway will reduce cheap electricity exports available to countries like the UK, Germany and the Netherlands.

US: Eyes on the weather forecast

US Henry Hub prices have climbed to a record high of $9.96 per MMBtu as of the time of writing on 23 August, almost touching the $10 per MMbtu mark, which would be the first time that gas has ever been this expensive.

It has typically averaged about $2 to $4 per MMBtu in previous summers, although prolonged abnormal weather and a high demand for LNG internationally has applied upwards pressure on prices.

Mild weather in the past week has reduced gas-for-power demand for cooling, resulting in 5.4 billion cubic feet per day (Bcfd) taken off gas demand.

Given that domestic natural gas production has decreased by only 1.1 Bcfd, it appears that Henry Hub prices are responding to the reverberations in Europe, as compared to domestic fundamentals.

US storage levels were at 2.519 trillion cubic feet (Tcf) full as of 17 August.

This is 367 billion cubic feet (Bcf) below the five-year average, and 296 Bcf below last year’s levels for the same period, adding further pressure on refilling US storages, which may keep Henry Hub prices high.

The US National Hurricane Center is currently monitoring a meteorological disturbance developing deep in the Atlantic Ocean, which has a 30% chance of developing into a tropical storm in the next five days.

This is the fourth major system that has been tracked for the 2022 hurricane season that officially started on 1 June.

Hurricane activity typically peaks around mid-August to mid-November, with hurricane intensity elevated when the La Nina phenomenon is present.

The US National Oceanic & Atmospheric Administration (NOAA) last week updated it forecast that indicates an 86% chance of La Nina occurring this season, ultimately falling to a 60% potential from December 2022 to February 2023.

Asia: LNG cargoes in the spotlight

Temperatures in Asia typically begin cooling around the end of August, which signals the end of the summer and the transition into autumn.

Temperatures in Northeast Asia have been forecast to begin decreasing for the remaining four months of the year, staying slightly above normal until the first week of September, after which they are forecast to remain above normal for the remainder of the month.

The transition towards winter has also been reflected in activity on the spot market, with northeast Asian utilities likely coming into the market soon for winter cargo deliveries.

Utilities such as South Korea’s Kogas and Japan’s Jera have already secured cargoes with deliveries starting from October and November, respectively.

Asian spot LNG prices have increased due to the intensifying interest, with October LNG deliveries pricing in at $57.82 per MMBtu, with a corresponding delivery in January costing the highest for the season at $65.96 per MMBtu.

Europe has been importing more LNG since the onset of Russian gas issues beginning with Nord Stream 2’s issues in September 2021, which was exacerbated by Russia’s invasion of Ukraine. Comparing total LNG imports for the period starting August 2021 to July 2022, Europe has on average imported 27.1 million tonnes more than the same period from August 2020 to July 2021. This comes at the expense of Asia, which has seen total imports drop by 11.2 million tonnes across the same period.

In South Asia, demand for LNG has fallen across the board, as South Asian buyers struggle to keep up with rising prices.

Pakistan and Bangladesh have clearly cut back on spot purchases this year as compared to previous years, although long-term contracted cargoes remain healthy.

India has also cut back on spot cargoes as compared to previous years, with term deliveries slightly reduced due to an existing term contract for 2.5 Mt per year not being fulfilled fully by Gazprom Trading and Marketing Singapore.

As a result, South Asia has seen reduced activity, mainly on the spot market, as it continues to be outbid by Europe and Northeast Asia.

In Northeast Asia, Japan and South Korea have both seen a decrease in overall LNG imports, for both spot and long-term contracted cargoes. China has been the biggest contributor to the drop in LNG imports in the region, with imported spot LNG falling to 4.31 million tonnes from January to July 2022, as compared to the 18.35 million tonnes for the same period last year.

This is most likely due to domestic gas and coal production picking up in China, coupled with several lockdowns that have ensued over China’s zero-Covid-19 policy, which have driven power and gas demand down since factories and ports have been forced to shut.

The year-on-year change for China gas demand has turned positive for July, at 1.5%, despite the weak second quarter.

Weather appears to be the main driving factor, with heatwaves having swept across provinces in the south – many cities have reached record-high temperatures above 40 degrees Celsius, which has increased gas for power demand for cooling purposes.

Droughts have also led to reduced hydropower in those regions, lifting gas-for-power demand to alleviate the power crunch.

Meanwhile, activities in the industrial sector have yet to rebound to last year’s levels, although it is now on a gradual recovery.

This has limited industrial gas consumption, which makes up the largest portion of gas consumption. Chinese demand for LNG imports is still at a low level and in July was 16% lower than a year earlier. LNG import activity will largely depend on the speed of recovery in the industrial sector and if there will be a cold winter.

Given that the Northeast Asia-delivered LNG price is now around $58.28 per MMbtu and the Northwest Europe delivered LNG price is around $62.80 per MMbtu, there should not be any incentive for US sellers with available cargo to ship cargoes to Asia.

The inter-basin arbitrage must be within $2.00 per MMBtu in today’s climate for an Asia-based cargo to be more profitable than a European-bound cargo.

A cargo from Australia has even made its way to Europe in recent weeks due to the competitiveness of Europe over Asia, such as in the case of a cargo from Australia’s North West Shelf LNG to the UK’s Isle of Grain Terminal.

This is the first time the UK will receive a cargo from Australia – LNG deliveries typically stay within their respective Atlantic or Pacific basins due to the extra cost and time incurred of making inter-basin deliveries.

With TTF prices surging to record levels, and Northwest Europe-delivered LNG prices following suit, the battle for winter cargoes is about to commence.

Northwest Europe-delivered LNG prices have surged from $42.65 per MMbtu two weeks ago to $62.80 per MMbtu today.

Asian Spot LNG prices have also surged to $57.82 per MMBtu as compared to $49.03 per MMBtu two weeks ago, as Asian buyers look to keep up in the market.

According to Fearnleys’ freight reports, freight rates have picked up in recent weeks, with charter rates West of Suez having doubled from $40,000 per day to $80,000.

Corresponding rates on the East of Suez have increased from $40,000 per day to $57,000. This is most likely an early onset of increased seasonal pricing, where LNG and corresponding freight costs are typically higher as the winter season approaches.

This has typically started around late September in previous years – however, it appears that the fear behind the preparation for this winter has forced market participants to secure their vessels early.

Shell’s Prelude floating (FLNG) facility off Western Australia has seen industrial action extended until 1 September.

Operations have ceased on the plant as the safety of production activities could not be guaranteed. Maintenance, which was planned for September, has been delayed as pre-maintenance preparation could be not completed.

Shell has announced that the maintenance will likely be delayed until next year.