Inventories grow at record pace Global gas market remains weak

Natural gas market remains bearish as inventories increase at record pace

A few weeks ago the International Energy Agency (IEA) warned that natural gas prices could spike again this winter, forcing governments to subsidize energy costs again, OilPrice.com reported on July 19th.

But not everyone is ready to accept this bullish view, with commodity analysts at Standard Chartered arguing that gas price risks remain skewed to the downside.

Standard Chartered notes that gas stocks continue to grow rapidly, despite the current heatwave and increased demand for electricity to cool Europe. According to Gas Infrastructure Europe (GIE), EU gas stocks stood at 945.2 bcm by July 16, up 21.73 bcm from a year earlier and above the five-year average of 18.46 bcm.

The EU's buying enthusiasm to fill its gas reserves before winter has so far not been forthcoming. And Europe imported 9.5 million tons of gas in June, down from 12.11 million tons in May and the lowest monthly total since August 2022. Hit by the worst energy crisis on record, the EU formed a gas buyers' union in 2022 and began issuing supply tenders. Around 50 gas suppliers and large industrial gas consumers in the EU immediately expressed interest in participating in the consortium for joint gas purchases. A key objective of the overall program is to keep gas prices low by buying in large volumes.

Europe's gas buyers' club has been a remarkable success, with the region's gas reserves almost 80 percent filled. Unfortunately, European purchases of U.S. LNG have also declined, with June imports coming in at 4.15 million tons, down from 5.63 million tons in May.

Meanwhile, U.S. natural gas inventories have continued to grow, increasing by 4.9 Bcf in the week to July 14, 2023, to 293 Bcf.

Excess natural gas inventories in Europe and the U.S. remain the biggest bearish factor weighing on natural gas prices, and barring an extraordinary black swan event, this situation will be difficult to reverse. The problem is that not only are natural gas inventories growing, but they are growing at an extremely rapid rate.

Standard Chartered notes that in order for inventories to reach all-time highs by the end of the injection season, they would need to increase by more than 40.6% above the five-year average from the current point in time. However, commodities experts say stocks are growing much faster than this critical level, with the average increase over the past week at 330 million cubic meters per day, almost 100% above the five-year average for the same period. If the current rate of gas injection is maintained, inventories will exceed 120 billion cubic meters by the end of the injection season, more than a billion cubic meters above the all-time high.

The massive influx of gas into the market has put near-term futures prices under significant pressure, with futures prices for October 2023 delivery now nearly €12/MWh lower than those for April 2024 delivery. By comparison, futures prices were also at a premium of more than €5 earlier this year, compared to a premium of €38 a year ago.

Asia Becomes Major U.S. Customer

However, it's not all doom and gloom for U.S. natural gas producers, as Asia is filling the void left by Europe.

Asian imports of U.S. liquefied natural gas (LNG) reached 1.34 million tons in June, up from 1.21 million tons in May, the highest since February of this year. In fact, Asia is now the largest LNG customer in the U.S., while Europe was the buyer of 65 percent of U.S. LNG production last year.

Currently, the Sabine Pass terminal has six full-time operating liquefaction lines, each capable of producing about 5 million tons of LNG, with a nameplate capacity of about 30 million tons per year. U.S. natural gas producer Cheniere processes more than 4.7 billion cubic feet of natural gas per day into LNG.The Sabine Pass Terminal has multiple pipeline connections to interstate and intrastate pipelines and is located less than four nautical miles from the Gulf of Mexico, making it easily accessible to marine vessels.

Previously, Cheniere also signed another long-term LNG sales agreement with the Norwegian state oil company Equinor ASA, under which Equinor will purchase approximately 1.75 million tons of LNG per year for 15 years at Henry Hub prices.