A tightening of the supply-demand balance last week saw TTF prompt contracts edge higher w/w, but that support hardly touched the Q3 19 contract, signaling that the race to the bottom is not over. While we should finally see some narrowing of the massive 24.5 bcm y/y storage surplus over the next two weeks, there will still be a substantial overhang to clear over Q3 19 and US LNG volumes will need to find a home in Europe if Asian demand does not soak up supply in late summer. We still expect the market to price in more gas into power and that means prices will trend down towards the parity fuel switch trigger, currently at 9.9 €/MWh.
In one respect, mid-June could mark a turning point for the European gas market. Our storage forecasts indicate that the y/y storage surplus—which has remained stubbornly unchanged since the start of Q2 19— should begin to taper over the next two weeks, receding to about 23.6 bcm by the start of July, from 24.5 bcm as of 15 June. Slowing injection rates depend on LNG sendout not ramping back up to massive y/y highs, like the 0.26 bcm/d send out we saw in April and May. Slow LNG receipts into the UK—with only two cargoes scheduled to arrive in the next two weeks—and fewer arrivals and planned maintenance affecting other NW European terminals will reduce sendout over the next few weeks. Given that the Aug-19 US export arb reopened after closing briefly in early June, the global market will need to find a home for nearly all US LNG supply this summer unless we see a big pricing down in the Sep-19 contract. One of the key factors to watch will be how much Europe can depend on Asian demand to soak up that late summer supply.
Race to the bottom still on
There is still a race to the bottom, with coal following gas down as lower oil prices have paved the way for a drop in the delivered cash costs of coal into Cif ARA. How much further Cif ARA can fall is still to be seen, although with Cif ARA front year prices closing Friday way down at 51.5 $/t, a further drop seems like it will be limited without another fall in oil prices. With EU carbon also more likely to break to the downside than the upside given growing Brexit risks, the relative fuel switch triggers are continuing to fall. We still expect the European gas hubs to trend down towards the parity fuel switch trigger given the need for higher demand to soak up supply. The parity fuel switch trigger is currently at 9.9 €/MWh. The price of that trigger is very close to the point where marginal Russian gas sales would be unprofitable for Gazprom, potentially choking off incremental supply. A gas price at 9.9 €/MWh would likely close the arbitrage window between the TTF and Henry Hub, although the shutting of the Henry Hub-TTF arb will only have any impact on the market if it also happens for the M+2 contract given the lead time for LNG deliveries. With the 5% trigger easing down to 11.9 €/MWh, the fall in relative prices will on its own put further downward pressure on the TTF.
Gazprom trying to cool things…
There is still a very real risk that Q1 20 will not have Nord Stream 2 (NS2) online and that there will be no transit agreement allowing Russian gas to flow through Ukraine, but the Russian side did look to cool tensions a little last week. After a meeting with European Commission Vice President Maros Sefcovic, the Russian Energy Minister Alexander Novak said that Gazprom had offered Naftogaz an out-of-court settlement designed to end Gazprom’s appeal against the arbitration award in the dispute between the two companies. Novak said the resolution of the ongoing gas dispute between Gazprom and Naftogaz would allow Russian gas to continue to transit through Ukraine on ‘prior terms’. The actual substance of what was being offered to Naftogaz was unclear, and with Naftogaz being the main winner under the initial arbitration case, it is not clear how much appetite they will have for an out-of-court settlement that significantly reduces that value of the award. It was also not clear what Novak meant when he mentioned ‘prior terms’. Does that mean Gazprom would agree to sending a high volume of gas through Ukraine when previously the company has talked about reducing the contracted annual quantity down to around 10% of the existing contract level? The current contract is for 110 bcm/y and Gazprom is now sending around 80 bcm/y, but flows via Ukraine will fall when NS2 and TurkStream come online. Even getting Gazprom to agree to 40 bcm/y would be seen as a good result for Ukraine. Instead, ‘prior terms’ could simply refer to a willingness on Gazprom’s part just to pay the same per mcm transit fee that currently persists in the agreement, a number that likely suits Gazprom more so than Naftogaz. Novak did indicate that three-way talks between Moscow, Kiev and Brussels would only likely resume in the second half of September, a timetable that we had been expecting to hold anyway. Gazprom also announced that once they get Danish permission, it could complete the pipelaying in five weeks for the first 27.5 bcm/y line of NS2. As such, an approval by the start of October from Denmark could still mean the start-up of NS2 in Q1 20. If anything, this widens the tension and suggests higher volatility for Q1 20 prices as both scenarios—no transit and no NS2; and transit and NS2—still seem possible.
A related matter is how much gas Ukraine will have in storage come the start of the winter. Naftogaz has indicated that it is targeting some 20 bcm in Ukrainian storage at the end of the injection season, which would be highest for a long time. Since 2014, storage inventory has peaked at 17.2 bcm while the end-of-withdrawal season minimum has been 7 bcm. The nameplate capacity for Ukrainian storage is close to 31 bcm. Even at 20 bcm, that will be some 3 bcm higher y/y. By early June, the Ukrainian y/y storage surplus was 2 bcm higher y/y, so stocks ending the injection season 3 bcm higher y/y will actually only amount to an increased call on supply of 1.0 bcm y/y over the next four months. In the cold Q1 18, Ukraine consumption was 14 bcm, so the country could get through Q1 20 with just gas in storage provided they do not take much gas out of storage in Q4 19. In Q4 18, the country did take 2.25 bcm out of storage. With a similar level of withdrawal in Q4 19, storage inventories would be pushed well below the 7 bcm level that Naftogaz does not usually like to see levels drop below.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|