• Prompt & Seasonal contracts retraced throughout the month
• Day Ahead contracts continued to retain volatility albeit continued to be rangebound
• Demand continues to remain below seasonal norms
  

Volatility in the Gas & Power DA contracts continued throughout January, as these contracts continued to be largely driven by weather. However, volatiltiy across the month was far less pronounced than it has been in previous months, as contracts remained rangebound. Despite reduced gas flows from Norway due to intermittent maintenance periods and a period of heavily reduced LNG sendout as high wind speeds prevented cargoes from docking, the relatively mild temperatures helped to limit any increases, as this tempered demand. Despite the high speeds preventing LNG sendout, LNG cargo arrivals into both the UK & North West remained remained extremely healthy throughout the month.

This, coupled with the multiyear high storage levels across Europe, as injections re-commenced into storage re-commenced at the start of the year weighed heavily on prompt contracts, as these retraced sharply throughout the month. As February approached, and the risk of gas shortages throughout Winter reduced drastically, the risk premia that had been included in contracts was also reduced, also contributing to the sharp decrease in prompt contracts. Besides the cooler weather and uptick in demand, prices also found some support over the conflict in Ukraine, as this came back into focus for the first time in a couple of months, with the anniversary of the conflict approaching at the end of February.

Concerns that fighting may begin the escalate as this date nears, which in turn could affect the remainign supply of Russian gas into Europe, which is now predominantly via the VelkeKapusany pipeline, which runs through Ukraine. Although the supply of gas into Europe remains relatively low (~5%), any damage or reduction in flows via this route, would have an impact on the short term contracts. Should conflict escalate, and spread to include further European nations, this may then lead to Russia targetting energy infrastructure across Europe as a means of retaliation. Whilst this is currently unlikely, should this occur, these remain relatively soft targets

Once again, Seasonal contracts followed a similar pattern to the short term contracts, and traded signifcantly lower throughout the month, particularly the Summer '23 contract as the start of this neared. As with the prompt contracts, this has been largely driven by the continued strong fundamental outlook.

LNG arrivals are expected to remain strong for the foreseeable future, and the potential restarting of Freeport LNG facility in the USA this month, following a prolonged period of downtime will only buoy supply. In addition, demand being below seasonal norms has meant that withdrawals from storage have been far lower than in previous years, which, coupled with injections at the start of January, allow for stocks to be sat at mulit-year highs.

This is bearish for both Summer '23, as less gas demand will be required to get storage facilities up to full capacity, and also Winter '23, as it is extremely likely that storage facilities will be at capacity as we enter next Winter. This is in addition to the capacity of Rough storage increasing by a further 33%. Whilst there has been the odd period of upside caused by the colder weather, and the impact this has had on prompt contracts filtering into seasonal contracts, any increases have been short lived as upward drivers continue to be far outweighed by the strong fundamental outlook.

Market Outlook

Whilst there still remains a small element of upside risk, due to cooler temperatures and the potential increase in demand that may be caused by this in addition to any potential escalation in the conflict in Ukraine, the overall outlook continues to be bearish. There is also the potential increase in Chinese demand, following the relaxation of their Covid restrictions, however, so far this has not had an impact on the global supply of LNG.

Storage levels remain at multi-year highs and as withdrawals are not proceeding at a similar pace to previous years, the expectation is that this will still be the case as we enter the Summer period. In addition, LNG supply into UK & North West continues to be abundant, and with Freeport LNG facility due to restart in coming weeks, the outlook is expected to only improve, despite any increase in demand from China.

The overall bearish trend is now expected to continue until the latter part of Q2, at least, where the greatest concern is now a signifcant increase in temperatures across both Europe and East Asia, as we experienced last July/August. During periods of extreme temperatures, demand increases, either for cooling or heating and as the European market is now so reliant on LNG, which has replaced Russian gas as the predominant gas source, abnormal temperatures in both regions may lead to a demand for cooling and cause LNG that may ordinarily head to Europe to be diverted to Asia.

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