Head of Commodity Strategy
Summary: Dutch TTF benchmark gas trades up 10% today at euro 130/MWh, thereby putting some distance to the current support level in the euro 100/Mwh area. Driven by the emergence of colder weather lifting winter heating demand, Gazprom threathening to cut gas transits via Ukraine, and not least a proposed price cap on EU gas
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Having spent the past month finding support in the €100/MWh area, the Dutch TTF front month trades up 10% today at €130/MWh after Gazprom threatened to cut gas transits via Ukraine, one of just two pipelines still in operation. However, despite seeing Russian pipeline gas flows to Europe down 79% year-on-year to 70 million cubic meters per day (mcm/day), the overall flow into Europe is only down 16% to 693 mcm/day, primarily due to a 136% increase in LNG imports.
The market is also trying the gauge the impact of an EU proposed price cap of €275 per megawatt-hour on natural gas prices to defend consumers against a steep rise in energy costs. The level, however, is well above the current price, but below last summer's highs when Dutch TTF benchmark gas prices went as high as €300+. The tool will only be used if futures on the Dutch Title Transfer facility exceed €275 for two weeks and the gap between TTF and liquefied natural gas prices is greater than €58 for 10 trading days.
Even at the height of the crisis in the summer, the price didn’t stay above that level for two weeks, suggesting the tool would not have been activated had it been in place then. That led several market watchers to question how powerful the cap will actually be. If approved by EU countries, the cap would be available for one year from January 1.
The announcement about the price cap has nevertheless raised concerns that it may distort price signals and reduce market liquidity while supply could be at risk with suppliers being incentivized to delay sales. Overall a mild start to the winter and strong LNG flows has left inventories close to full across the continent with the annual withdrawal season having started 3 weeks later than normal.
The market maintains a sanguine view on prices this winter with the peak demand month of February only trading €9/MWh above the December contract at €139/MWh. Even the 2023/24 winter from October to March can be hedged below €140/MWh at this point but with the current winter having just started that price will depend on how much gas will be left in storage next spring.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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