• Day Ahead & Prompt contracts retraced sharply but remained volatile
• Strong LNG arrivals into UK & Europe continued throughout December
• Injections into storage re-commenced as demand fell due to warmer temperatures
  

Both Gas & Power DA contracts remained volatile throughout December, largely driven by significant swings in temperatures, which impacted demand. For the first half of the month, as temperatures plummeted, demand increased and short term contracts, including Day Ahead and the Front Months all found support and saw significant increases. This was despite a continued healthy fundamental outlook as arrivals of LNG into both the UK & Europe remained strong, European storage levels remained healthy and consistently sat above 80% full and although demand increased in line with colder weather, this was still below the norm for these temperatures.

As temperatures increased throughout the month, and demand dropped off further, this weighed on contracts, which subsequently caused these contracts to retrace sharply, with Power & Gas Day Ahead contracts ending the month 68% & 44% lower respectively. Temperatures across Europe soared over the festive period, with numerous countries seeing record temperatures for the time of year which again, weighed on demand. The reduction in demand allowed injections into storage to re-commence across Europe and levels are currently the 2nd highest for the time of year since 2010.

The increased storage levels helped to weighed on Prompt contracts as concern over supply during the Winter period reduced and risk factored into these contracts was eroded, despite Bullish factors remaining. These factors included the potential increase in Chinese demand, following the relaxation of their strict Covid rules, the futher delay in the restarting of the Freeport LNG facility in the USA, which continues to remain offline despite being expected to restart in October and both the UK & European LNG price falling below the East Asian LNG price, which could cause cargoes to be diverted away from Europe due to the price being more advantageous elsewhere.

Seasonal contracts followed a similar pattern to the Prompt contracts throughout December, largely taking direction from the Front Month

contracts, which were subsequently driven by weather. Contracts edged higher through the first part of the month as demand increased and withdrawals commenced from storage, potentially increasing demand for injections into storage throughout the Summer period and furthering concerns over the certainty of supply for the Winter '23 period, despite continued short-medium term strong fundamental outlook.

Once the temperatures started to increase throughout the latter part of the month, the Seasonal contracts also started to fall sharply, with demand being reduced across Europe by the higher temperatures, injections recommencing into storage, reducing the potential demand for Summer and alleviating the Winter '23 risk in addition to the continued strong supply LNG to both the UK & Europe.

The LNG supply outlook is expected to be further eased when Freeport LNG does eventually restart, and this is expected to occur at some point in Q1, in addition to increased LNG send out in Western Australia which is expected to supply the East Asian market, due to new deal being reached.

All of these factors outweighed potential upside risk in the market caused by a potential increase in Chinese demand following the relaxation of their COVID restrictions, which is expected to cause a large increase in production following a prolonged period of reduced output.

Market Outlook

We are now into the peak Winter period of December & January and although upside risk still remains, the overall fundamental outlook continues to be bearish. We may see some support for Day Ahead and prompt contracts in the early part of December as temperatures are forecasted to drop significantly below seasonal norms, with demand subsequently expected to increase.

However, with the current forecast expecting temperatures to increase in line with seasonal norms and then for them to increase as we enter January, provided this forecast remains the same and the strong fundamental outlook also remains in place then we would expect any support to be tempered and increases to be relatively short lived.

In addition to the strong fundamental factors currently in place, Freeport LNG facility is expected to be back online at 80% of capacity in mid-December, further adding to the healthy global supply outlook of LNG. In addition to this, there is also expected to be increased output from Norwegian gas fields following prolonged periods of maintenance over the past 2 months, all nuclear reactors in the UK that have been offline are expected to return along with an uptick in wind generation following a 10-14 day period where generation was negligible and gas for power demand substantially increased.

All of these factors are expected to offset any expected increase in Chinese demand. Should these conditions remain in place at the start of Q1, we could see a large retracement of the Seasonal contracts, particularly Summer '23 as risk is reduced closer to delivery.

Download the full insight here: