Europe could absorb surplus LNG by filling storage but this raises the prospect of a “Groundhog Day" of $2 gas in Europe again next summer, according to the latest study of the Oxford Institute for Energy Studies (OIES) on Friday.
In the classic 1993 film Groundhog Day, Bill Murray plays Phil Connors, a cynical, self-centered TV weatherman covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, who becomes trapped in a time loop forcing him to relive Feb. 2 repeatedly.
According to the study, the popularity, and cult status of the film resulted in the term entering dictionaries to describe "a situation in which events are or appear to be continually repeated".
The study written by Mike Fulwood, a senior research fellow at the OIES questioned the latest situation of natural gas prices.
"A question facing the European gas market, and gas prices, in particular, is whether 2021 will be Europe’s Groundhog Day, repeating the very low prices of 2020?" it said.
Fulwood said that forward natural gas prices for 2021 of Europe and Asia suggest a fundamental change in the supply-demand balance for the global gas market.
"However, although an increase in gas demand and hence in LNG trade is expected in 2021, this may not be enough to justify the $4-$5 per million British thermal unit prices seen in the forward curves for the year," Fulwood said.
In Europe, he said pipeline imports have taken the bulk of the reduced demand in 2020, with LNG imports being largely maintained with storage again filling as in 2019.
"However, our model suggests that pipeline imports will rebound in 2021 and, for prices to rise back as projected, this would imply that LNG supply would again need to be shut in to balance the market at those prices," Fulwood said.
He noted that Asian LNG demand might rise even more than the sharp growth expected but this would largely rely on demand from China, India and the traditional importers of Japan, Korea and Taiwan to grow even faster.
According to the study, LNG export capacity, or pipeline supplies, has not stood still since 2019 so even if demand in 2021 reverts to 2019 levels, it would still leave a surplus supply on the market.
"Europe could, however, again absorb the surplus LNG by filling storage but the logic of that suggests the market clears at much lower prices than the forward curve suggests. This raises the prospect of the Groundhog Day of $2 gas in Europe again next summer," he said, adding that, "In the film Groundhog Day, Bill Murray’s weatherman, after hundreds, if not thousands of repeats of February 2, finally transforms into a decent, caring human being and is released from the time loop. How long might the time loop last for the European gas market?"
The OIES calculates the prices for Title Transfer Facility (TTF) in the Netherlands, the ANEA spot price in Asia and the Henry Hub price in the US.
It then calculates the highest netback from Europe or Asia to the Gulf of Mexico based on the relevant transport costs.
In 2018 the margin was, for the most part, above $3, which meant it easily covered the full cost of delivering LNG to the respective markets, including the cost of liquefaction.
In 2019, prices collapsed and the margin fell sharply but was still positive, meaning on a variable cost basis, exporting US LNG was still profitable. This all changed in 2020 as the impact of COVID-19 saw prices in Europe drop to below $2 and in the low $2 in Asia, leading to negative variable cost margins and substantial shut-ins of US LNG.
By Murat Temizer