Key takeaways 

•         Global gas prices have surged higher with TTF hitting €45/MWh, an all-time record, and JKM prices near $16/MMBtu
•         An increasingly dire storage situation in Europe combined with a 30% yoy jump in Chinese LNG imports has fueled the rally
•         Upside risks this winter given limited inventories and spare capacity. Panama Canal congestion to support JKM-TTF gas spread

LNG prices surge higher on relentless Asian demand and…
Global gas prices have surged higher this summer on the combination of insatiable Asian demand and untenably low European storage inventories. The European benchmark, TTF, has surged to €45/MWh or $15.50/MMBtu, a new record, which has in turn propelled the Asian LNG benchmark, JKM, to nearly $16/MMBtu, the highest seasonal level ever recorded. Chinese demand has been the primary driver fueling global LNG demand growth this year. As the Chinese economic recovery kicked into full gear, thermal generation jumped nearly 18% YoY through the first half of 2021. Not surprisingly, LNG imports soared as well with year to date volumes tracking nearly 30% higher YoY through June or 8.6 million tons. China is on pace in 2021 to take over as the world's largest importer, a title Japan has held for the past half century.

…a European storage crisis that has pushed TTF to records
The storage situation in Europe has turned increasingly dire in recent weeks as inventories remain significantly below the 5yr average, 16 Bcm or 20%, with winter quickly approaching. Europe has been unable to build sufficient inventories as its three typical balancing levers have lost elasticity. 1) Gas to coal switching - high carbon prices have limited the amount of gas to coal substitution this summer (see Carbon drags EU nat gas prices higher) 2) Russian supply - despite record prices in Europe, Russia has declined to export additional volumes to Europe as it hopes to push Nord Stream 2 over the finish line, and 3) LNG imports have vanished from Europe in favor of the higher priced Asian market. As the storage crisis has unfolded, European buyers have pushed prices higher and set the floor for global LNG prices.

See upside risks this winter, JKM-TTF to remain supported
Heading into the winter season, the LNG market's fuse has been lit. Global utilization rates have been running at the high end of the 5yr average before turning lower this summer due to maintenance outages. With little spare production capacity available and limited European storage, the typical lever for balancing the global LNG market, there is little cushion left this winter. While a normalization of European gas prices would translate to lower LNG prices, the risks in our view remain skewed to the upside. Given the current storage environment, any European supply disruptions, hiccups in the commissioning of Nord Stream 2, or a colder than normal winter could result in an asymmetric move higher for both TTF and JKM prices. In addition, we expect the Panama Canal to remain a bottleneck as Asia continues to call on Atlantic basin supply. As a result, longer supply routes through the Suez Canal or around the Cape of Good Hope will be necessary and support even wider winter JKM-TTF spreads, a development that has already been unfolding in recent weeks despite record TTF prices.