European gas prices may be underestimating the risks from ongoing Liquefied Natural Gas (LNG) supply disruptions through the Strait of Hormuz, with resilient imports and weak Asian demand masking the impact for now, Goldman Sachs said in a note dated April 2.
* European natural gas markets are pricing a lower-than-expected risk premium even as ~19% of global LNG supply (80 mtpa) remains disrupted via the Strait of Hormuz, including lasting damage to some Qatari output, Goldman said.
* “We believe that the main reason for the limited risk premium observed in European gas prices has been that European LNG imports have thus far remained relatively resilient, with the bulk of the negative impact of the supply shock showing in lower Asia LNG imports, particularly in China,” the note said.
* The bank noted that March LNG imports into North West Europe beat its expectations by 33 mcm/d (1.2 Bcf/d or 9 mtpa), primarily driven by net China LNG imports.
* It noted that the drop in China LNG imports has been primarily weather driven, and exacerbated by elevated price sensitivity.
* With Chinese demand expected to recover and Asian LNG prices trading above Europe, Goldman expects cargoes to increasingly divert to Asia, potentially tightening European supply.
* Goldman added that current gas prices are not sustainable under a scenario of a more prolonged disruption, with the daily loss of Hormuz LNG flows still near 300 mcm/d, “far above the miss in China LNG imports of 68 mcm/d.”
* “Should this LNG supply shock last at its current scale beyond April, we think the gas market would require broader demand destruction, likely driving TTF prices to test a higher 75-100 EUR/MWh range,” the bank noted.
(Reporting by Anjana Anil in Bengaluru Editing by Keith Weir)