Energy Market Update - Friday 7th July 2023
In the news this week
The race between European and Asian buyers of Liquified Natural Gas (LNG) to secure long-term supply agreements with the US is driving investment into new LNG projects, which will in turn help boost a market that is potentially facing a supply shortage. The growing number of long-term supply agreements that have been signed over recent years with the US will help them underwrite any financing needed for new or expanding LNG projects. It is thought that Europe's sudden surge in demand for the super-chilled fuel is likely to hold for years to come, despite the pressure from within Europe to ramp up renewable generation as quickly as possible. Long-term supply agreements with US based LNG exporters of LNG usually provide the option for the buyer to redirect the gas to elsewhere if it is not required domestically, which will help.
This week Centrica announced it had increased storage capacity at the UK’s largest facility to 54 bcf, warning that gas markets remain volatile. The Rough site was closed in 2017, but reopened last year, with the ability to store around 30 bcf of gas. The Rough site will now be able to hold enough gas for 6 days of average demand. The facility currently provides half of the UK’s total storage. The storage site should help keep prices down for consumers, by helping to balance Britain’s gas market in time so flow supply. Centrica’s long-term ambition is to turn Rough into the largest long duration low carbon energy storage facility in the world, capable of storing both natural gas and hydrogen. Any further storage capacity increases would require significant investments and some form of regulated return model.
On Wednesday, China's Zhejiang energy announced it had struck a 20-year LNG supply agreement with Mexican LNG supplier Mexico Pacific to purchase a million metric tons of gas annually. The first shipments will commence in 2027 but will be on a free-on-board basis, which gives the supplier the flexibility to divert shipments elsewhere if they are not required domestically. The Zhejiang Energy Group is considered to be one of China's second tier LNG players, as it is only a local government-backed distributor. This marks a change as up to now, only China's major energy companies have been active in the global LNG market. This news provides further evidence of the race to secure LNG supplies globally accelerating, which could in turn lead to further tightness in the market and therefore greater volatility as a result.
Current Market Drivers
Wind generation is forecast to plummet over the weekend, increasing demand for gas-fired generation and offering upward pressure to prompt UK energy contracts.
EDF have revised the return dates of five of their reactors in France. Two have been delayed by a month, while the other three have been brought forward a week to a month, which is likely providing mixed signals.
Three LNG vessels are currently set to dock in the UK over the course of July, which is still significantly down on the levels we had up to May, which is likely applying some upward pressure to near curve gas contracts.
Total European storage has hit 77%, 21% above where it was at the same time last year, which is likely to lead to a short-term reduction in injection into storage demand.