The summer outlook remains bearish, as Europe failed in April to make any dent in the 25 bcm y/y EU storage surplus and looks set to finish May with that overhang at around 23 bcm. The same question persists as previously—how will the market balance with so much additional gas in storage and 16 bcm more LNG expected to come into Europe over summer 2019.
We still forecast storage to end the injection season 12 bcm higher y/y, which would mean at tank tops. Incremental LNG imports are still expected to start to ease come Q3 19, but will be up by around 5 bcm y/y. As we have started to see in Q2 19, all sources of pipeline gas are expected to come off y/y—supply from the EU and Norway (-5.3 bcm), Algeria (-3 bcm) and Russia (-2.1 bcm). We expect demand to add around 3.7 bcm y/y over the quarter, driven largely by increased gas demand in the power sector, a development that does require TTF gas prices to move to the 5% fuel switching trigger (currently at 13.7 €/MWh). This means that storage injections will fall by just over 9 bcm, taking the storage overhang down to that 12 bcm y/y target.
The expectation of starting the winter with 12 bcm more gas in storage y/y and another 11 bcm of incremental LNG targeting Europe suggests a looser balance by 23 bcm y/y in winter 2019-20. Add in the potential operation of the first 27.5 bcm/y leg of the Nord Stream 2 (NS2) pipeline and the general outlook for the European market should be bearish in winter 2019-20. While winter does bring its own inherent risks and a colder winter y/y on its own could absorb most of that supply, the EU gas market still faces a particular set of risks this winter.
The risks are around the operation of the first leg of NS2 and the associated risk of the transit of Russian gas through Ukraine. The risks have started to come into stark relief in the last month, as Denmark sought to delay giving NS2 permission for a northern route around the country’s exclusive economic area around the island of Bornholm. By requesting an additional environmental impact statement on a southern route, the Danish now has another six months before they need to provide that approval.
The Danish delaying tactics are all part of the renegotiation of the agreement on transit of Russian gas through Ukraine, with the current agreement expiring at the end of 2019. Ukraine’s Naftogaz and its politicians have been upping the rhetoric that if a new agreement is not signed, then Russian gas will stop flowing through the pipeline come 1 January 2020. Gazprom, on the other hand, is talking about reducing the annual flow commitment from 110 bcm/y to 15 bcm/y, which would hugely reduce Ukraine’s transit revenue. An agreement needs to be found and the Danish stance on NS2 is all about getting the annual flow commitment to a higher number. The EU looks at this from two perspectives—a security of energy supply issue and it also sees Ukraine as a more westward looking partner in the region that it needs to support.
A tripartite meeting between Gazprom, Naftogaz and the EU is supposed to take place in May, although a date has not yet been set. This set of interrelated issues does hold out very different outlooks for Q1 20—either a very comfortable winter with both NS2 and Ukrainian transit online or a very tight winter with no NS2 and no transit of Russian gas through Ukraine. While sense dictates an agreement on transit will be reached, paving the way for NS2 approval, the current brinkmanship we see from the two parties means that outcome is not guaranteed. With the Dec-19–Jan-20 contracts pricing at parity, the market seems far from pricing in any of the upside risk.