Gas markets with focus on Asian LNG prices and the power market

The risk premiums since the start of the escalation in the Middle East have largely been priced out again on the gas futures markets in the meantime. The further development of gas prices in November will depend on the weather and the geopolitical situation, but also on Asian LNG demand.

November statistically less volatile than October

On a long-term average, front-month trading in November is less volatile than in the previous month of October. Based on the monthly average price, prices usually do not deviate by more than 17% upwards or downwards from a statistical perspective.

For the current month, this results in a statistical fluctuation band (95/5 confidence interval) for trading in the front month Dec-23 of a minimum of EUR 39/MWh (5% quantile) and a maximum of EUR 55/MWh (95% quantile).

In the following month of December, however, front month trading is significantly more volatile. In the past, deviations from the monthly average of up to 30% have been observed here.

Mild weather forecasts

The latest weather forecasts do not indicate any potential for extreme price developments. The weather is expected to be cooler and much less windy than recently until the weekend. This explains the recent firm trend in prompt gas prices.

Over the remainder of November, daily average temperatures in Germany are expected to develop between 5-9°C and would therefore continue to be up to 2 degrees above the seasonal norm. Wind power production is also expected to be above normal again next week.

A change in the geopolitical situation can of course change the mood on the market immediately. At present, however, it appears that the markets have largely priced in the current situation. Traders are therefore looking to Asia, but also to the gas-coal switch.

Rising LNG demand in Asia

For the front month of Dec-23, prices of up to USD 17.5/MMBtu were recently paid on the Asian JKM, equivalent to around EUR 54/MWh. TTF LNG futures on the ICE were last quoted at around USD 14.50/MMBtu for Dec-23, i.e. USD 3/MMBtu (around EUR 9/MWh) less than on the Asian JKM.

The five largest Asian LNG demand countries (Japan, China, South Korea, Taiwan, India) have imported 78 LNG deliveries since the beginning of the month and expect a similar number of LNG tankers in the next two weeks.

This is roughly double the amount of LNG imported than in Europe. Nothing unusual if you compare this with the statistics from previous months. From a European perspective, however, the price spread between the two markets must not widen any further or should rather narrow in order to ensure sufficient LNG imports throughout the winter.

Gas-coal switch limits upside potential

Further upward potential for gas prices is limited by the gas-coal switch. Gas prices are currently at the upper end of the switching range. At the current price level, gas-fired power plants for electricity generation with an efficiency of less than 60 percent are no longer in the money.

Gas-fired power plants with an efficiency of 58 percent recently produced electricity at the same cost as hard coal-fired power plants with an efficiency of 40 percent, i.e. the clean spark spread and clean dark spread were identical at these efficiency levels.

As a result, the electricity grid capacity of gas-fired power plants in Germany recently fell below 3 GW on some days. The share of natural gas in total electricity generation therefore fell to as low as 5 percent at times. In the previous months, the share was still up to 15 percent.