By: S&P Global – The gas and LNG sectors are calmer after an annus horribilis that threatened to derail the very functioning of these markets. Following the turmoil, what has changed, and what remains the same?
Gas and LNG markets are showing signs of emerging from the trauma they endured since early 2022. Trade activity, futures volumes, price levels, and volatility are all moving in a positive direction. While risks remain for this winter and next year, an outlook that looked tight for many years to come has softened, thanks to supply-side investments and prudence among consuming nations.
Comparing the volatility of gas and LNG benchmarks with that of oil highlights how turbulent things have been for the former.
Volatility really started to pick up in 2021, when the 30-day moving annualized volatility averaged more than 100% for both Platts JKM, the global benchmark reflecting Northeast Asia LNG cargoes, and Dutch TTF, the largest European gas hub. It escalated further in 2022, reaching levels across the entire year of 175% for NBP and more than 100% for JKM and TTF. The consequences of these volatility levels were significant. They triggered raising of margin requirements at clearing houses to levels that approached the entire value of the derivative contract – this was five to six times the norm.
As a result, activity either dried up or moved over-the-counter, where companies were often more willing to have less stringent margin requirements. Market transparency took a hit. It also caused difficulties for risk management of cargoes, crimping some companies’ ability to trade.
The margin calls on future positions for some entities ran into billions of dollars, further occupying time and capital. The outright price of LNG cargoes, which on one day in August reached close to $300 million per cargo, also dampened many market participants’ activities.
Companies were therefore faced with an evaporated liquidity pool, fewer potential counterparties, huge cash calls, and – toward the end of the year – surging governmental intervention in markets. From European gas and power to South Korean power and Australian gas, previously hands-off policymakers were starting to impose long-lasting and far-reaching changes to utility markets.
The industry entered 2023 bruised – and most expectations were for an equally bruising year ahead.
In November 2022, S&P Global Commodity Insights’ forecast for JKM suggested the benchmark would remain between $33 and $34/MMBtu on average in 2023-2024, more or less where the benchmark averaged in 2022. As of October 2023, S&P Global’s forecast for this two-year period has changed to an average of $14-$15/MMBtu, before dropping close to $10/MMBtu in 2027.
The recalibration is understandable as the demand-side reaction has been impressive, with consistently lower gas demand in Europe and greater generating fuel optionality in major consuming markets like China, while supply will be stoked by significant incoming volumes from North America and the Middle East in the coming years.
The effects of greater balance are being felt in reduced market volatility.
JKM, for instance, has seen volatility more than halve in the first nine months of 2023 versus 2022. While European gas hubs NBP and TTF continued to show high levels of volatility, they are also lower than a year prior.
Due to exchanges using a long-dated scanning period for margins, this reduced volatility is yet to be fully felt in margin requirements, which remain higher than historical norms. Volumes are starting to recover, though, with around 14.5 million mt of JKM derivatives being traded in October, the highest level since January 2022.
Absolute price levels, while historically still elevated, are more manageable at about $60 million per cargo. More market participants have therefore been able to hedge and trade LNG cargoes.
The amount of times a cargo changes hands before it arrives at its destination has thereby increased. After cratering in 2022 and remaining slow into early-2023, trade has started to pick up, with more competition between the Atlantic and Pacific basins for flexible LNG allowing for greater divergence of views around pricing. The increase in trade activity is most easily visible in the Platts LNG Market on Close (MOC) assessment process, our most transparent window into the market.
July-September became the quarter with the highest reported trades in the MOC since late-2021, while October was a record month for reported trades, with nearly 1 million mt of physical trades reported in the process. There were 180 full cargoes bid and offered during October, also the highest on record.
While the market is undoubtedly healthier by all these measures, the painful experience of 2022 has yet to be forgotten.
At the Singapore International Energy Week conference in October, the audience was polled on where they see JKM reaching by end-2023. Despite the forward curve hovering around $17-$18/MMBtu at the time, 40% of the respondents believed JKM would settle somewhere between $20 and $30/MMBtu by year-end.
Market participants still harbor upside fear: it will take time for nerves to calm and memories to muddy.
