LNG: Sharp Rise In European Gas Prices Ahead Of End To Russian Flows
European natural gas prices rose sharply on the last day of 2024 with the agreement allowing the transit of Russian gas through Ukraine due to expire the next day. An alternative has yet to be sorted and Gazprom announced that flows halted on Wednesday. There are also concerns that a shift to colder weather in January will also increase the rate of inventory drawdown with storage levels currently under 75%.
- European gas rose 5.6% on Tuesday to EUR 50.23 to be up 5.7% in December and the highest level in 2024 to be 32.1% higher on the year.
- Slovakia, Austria and Moldova will be particularly impacted by the end of Russian pipeline flows through Ukraine, but there are concerns that energy bills will also rise in the UK.
- Russian supplies on this route are estimated to account for around 5% of European consumption, according to Bloomberg. Europe aims to replace this gas with increased LNG imports and flows from Norway, but this makes them more vulnerable to global supply disruptions. One Russian pipeline that supplies Serbia and Hungary remains in operation. The one into Poland is shut.
- European Commission President von der Leyen aims to end EU use of Russian fuels by 2027. The EC said that the group knew the deal would end on January 1 and is prepared.
- In contrast, US gas fell 7.7% to $3.63 after soaring 15.8% on Monday on forecasts for colder weather. It ended the month 22.2% higher. Snow and ice are still expected for the eastern and central US, according to AccuWeather.
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LNG: European Prices Higher As Cold Weather Drives Inventory Drawdowns
European natural gas prices reached a high of EUR 49.32 early in the session and then trended lower but were still up 1.5% on Monday at EUR 48.54 supported by expectations of increased heating demand from cold weather. Gas inventories are concerning markets with withdrawals occurring at a faster rate than last year complicated by the expiry of the Ukraine transit deal at end-2024.
- European storage is currently around 85% full, 10pp lower than the same time last year. The EU target for February is 50% full. Europe has been competing with Asia for global supplies since Russia’s invasion of Ukraine.
- The European Commission has said that energy supplies will be fine if Russian pipeline gas flows stop at the end of the year and it is helping member states to find other sources, according to Bloomberg. There had been talks with Azerbaijan to find an alternative route for Russian gas. The EC also observed that flows have been unaffected by the introduction of US sanctions on Gazprombank in November.
- US gas fell 4.5% to $3.21 as forecasts shifted to warmer weather for the southern two-thirds of the US in mid-December, according to NatGasWeather. Temperatures are expected to return to their seasonal norms around the weekend after a snow storm across the Great Lakes.
JGBS: Futures Higher Overnight, 10Y Supply Due
In post-Tokyo trade, JGB futures are stronger, +6 compared to settlement levels, after US tsys finished slightly cheaper.
- US tsys moved off NY session cheaps after Fed Gov Waller leaned toward a rate cut at the December 18 FOMC policy announcement, citing recent "economic data in hand today and forecasts that show that inflation will continue on its downward path to 2 percent over the medium term."
- Earlier in the NY session, Fed Bostic remained confident that inflation is slowing but is uncertain how restrictive monetary policy needs to be.
- There was limited reaction to a broadly stronger-than-expected ISM manufacturing survey in November (at its highest since June): 48.4 vs. 47.5 est and 46.5 prior. There were also some encouraging signs from new orders and prices paid, which declined: 50.3 vs. 55.2 est and 54.8 prior.
- Focus now turns to Wednesday's ADP private employment and ISM data ahead of Friday's employment report for November.
- The potential for a Dec BOJ hike is still providing a focal point for JGBs. The next major release will be on Friday's wages data. Next week delivers Q3 GDP revisions then the Tankan survey is out on the 13 of Dec. Today's data calendar just has monetary base figures alongside 10-year supply.
JGB TECHS: (Z4) Recovers Off New Lows
- RES 3: 149.55 - High Mar 22 (cont)
- RES 2: 147.74 - High Jan 15 and bull trigger (cont)
- RES 1: 146.53 - High Aug 6
- PRICE: 142.93 @ 16:22 GMT Dec 02
- SUP 1: 142.51 - Low Nov 22
- SUP 2: 142.23 - Low Jul 02
- SUP 3: 140.21 - 1.236 proj of Mar 22 - Nov 1 ‘23 - Jan 15 price swing
Prices fell again late last week, extending the recent pullback. Recent weakness has culminated in a break of 143.57, marking both the Jul 17 high on the continuation contract as well as the Oct 22 low. For now, the 50-dma tops out at 144.19, and marks first resistance. Any recovery would open 146.53, the Aug 6 high (cont) and a bull trigger.
