European gas prices, which have remained subdued recently, are anticipated to continue their decline as liquefied natural gas (LNG) shipments from US exporters reach all-time highs.
This surge in LNG deliveries to the European Union (EU) is a result of US suppliers struggling to find buyers in Asia for their new cargoes, as stated in a note by RBC Capital Markets.
While this trend ensures an ample gas supply for the EU during the summer, it is still uncertain whether the bloc can avoid price shocks in the winter due to current storage levels. The storage reserves currently stand at approximately 25% above the demand witnessed during the 2021-22 winter season, according to the note.
RBC’s Global Gas & LNG Strategy report mentioned, “The US continues to export record amounts of LNG, allowing Europe to quickly fill up storage amid curtailed consumption by taking LNG market share given the lack of any real green shoots as yet from the Asian buyers club.”
The report also noted that while spot gas prices may experience short-term pressure, the time spreads are expected to widen as winter pricing remains relatively stable.
RBC further stated that with gas storage currently at around 65% capacity, favorable market dynamics favor European buyers. The bank predicts that the EU will achieve its 90% storage target well ahead of the November 1 deadline.
“Our updated scenario analysis indicates storage reaching 90% capacity by late July-early August. We anticipate that summer pricing will likely weaken further as storage nears full capacity, as inflows from record US LNG exports, consistent domestic volumes, and Russian remnants outpace the constrained demand and limited storage capacity,” RBC explained.
On the other hand, RBC cautioned that while structural winter pricing is expected to remain relatively stable, the potential for a supply deficit or price spike cannot be ruled out. The bank mentioned, “We anticipate the spread between summer and winter contracts to continue widening, based on recent trends.”
RBC added, “Full storage might not necessarily mean crisis averted. Since the start of the Russia-Ukraine conflict, European policymakers have emphasized the importance of ensuring full storage ahead of winter. However, on an EU level, maximum storage capacity is estimated to be around 25% of 2022 consumption, with variations across different countries.
Additionally, withdrawal rates decline as storage levels deplete. Despite EU initiatives aimed at equalizing exposures between countries, the cumulative exposure size suggests that even entering winter with 100% full storage may not guarantee sufficient protection against price shocks.”
Regarding US LNG exports, RBC highlighted that these exports reached a record 8.1 million tonnes in April, surpassing the previous record set in March. However, with no new project start-ups until mid-next year, there is limited room for further substantial growth.
RBC concluded by noting, “What this means for the macro is that should the need arise later this year, the US is unlikely to supply the market with additional LNG as it did to some extent last year, which could result in another zero-sum game and possible pricing implications across Europe and Asia.”
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