TOCOM Energy

Welcome back to JPX energy market updates.

In this week’s video, let’s take a look at the natural gas market.
As most gas supply in Europe is now priced with reference to hub traded prices, with TTF far and away the most traded hub. The EU’s energy ministers agreed Dec. 19 to implement a new gas market correction mechanism or commonly known as price cap that imposes a TTF price ceiling of Eur180/MWh for a year from Feb. 15, 2023.

Because natural gas market is still a seller’s market with less supply and more demand, it is increasingly becoming a global commodity that is traded between regions as the form of LNG.

Europeans have scrambled to build LNG import infrastructure in an effort to find alternatives to pipeline deliveries from Russia following its invasion of Ukraine in late February. Constraints at existing European regasification terminals in 2022 have led to a dislocation between the northwestern European delivered LNG price and the continental TTF price.

Because LNG prices better reflect the gas price developments at a global level, the proposed regulation also clarifies how the LNG reference price will be calculated. The reference price is a daily average of a number of price assessments comprising the following price assessment.

The correction mechanism will be automatically activated if the market sees two conditions met, the TTF month-ahead price exceeds Eur180/MWh for three working days and is Eur35/MWh higher than the reference price for LNG in global markets for the same three working days.

The front-month TTF London close versus the average of Platts JKM and Northwest Europe LNG price assessments shows that about 14% of pricing days in 2022 would have fallen within the scope of the correction mechanism according to an analysis by S&P Global. The vast majority of these include the period from July 26 to Sept. 27, when Europe intensified efforts to fill its gas storage capacity by targeted date in November.

The problem with a price cap is that it addresses the symptom rather than the cause-the massive supply shock to both the European and global LNG market caused by the reduction in Russian gas flows.

Secondly, we could see a shift in focus to over the counter market as the EU price cap is primarily designed for the future market. It will make exchange future contracts illiquid and we could see large gaps in pricing between the OTC and exchange markets. ICE has warned that a price cap on front-month TTF gas futures could trigger widespread market distortion and the risk to the viability of the TTF gas market.

Since Russia slashed pipeline gas supply from Russia to Europe, the EU and Asia have competed for LNG cargoes with prices setting record highs on both markets earlier this year amid intense competition and supply-side issues. The EU has managed to outbid Asia this year because of the higher prices in Europe and low demand in Asia, including in China. Massive LNG imports had helped Europe’s gas storage levels crossed the 90 per cent mark before the start of winter.

The EU gas price cap might not have an impact on the bloc’s current winter demand but could impact its procurements to fill inventories for the 2023-24 winter where gas and power markets may be even tighter in 2023 as the region faces its first year without significant volumes of Russian pipeline gas and rising Asia demand.

Among Asian LNG suppliers that actively sold LNG cargoes to Europe this year, some importers may opt to sell their LNG, which was originally planned to be sold to Europe, locally or to other markets next year should the global LNG price rise above the EU gas price cap which will in turn lead to less supply in Europe and raise the LNG price in Europe again.

On the other hand, a lack of new liquefaction facilities coming online globally stands to constrain supply growth despite persistently high prices next year. The result will be global gas markets forced to balance on demand destruction and existing stocks instead of LNG supply growth, extreme volatility in the global LNG market in 2023 is likely to continue.

JKM is the Northeast Asian spot price index for LNG delivered ex-ship to Japan and Korea, assessed by Platts. The price reflects not only the cargo delivered to Japan and Korea, but also the cargo delivered to China. Rising liquidity for the JKM indicators has supported the movement to start using it as a benchmark in both spot and long-term contract pricing.

Similar to the OTC swap contract, JPX LNG future contract is cash-settled contract which uses average of the assessed Platts JKM prices during the period from 16th of the two month prior to the contract month to 15th of the prior month of the contract month as the final settlement price. The JPX LNG future contract provides a more convenient hedging method for the majority of investors compared with other derivatives, For more details about the contract, please refer to the official JPX website.