Europe is poised to enter September with a massive 18.5 bcm y/y storage overhang, making it look increasingly likely that the recent drop in pipeline supply will need to be sustained—or exacerbated—well through September. It is clear that the reduction in supply since July will not be enough to balance the market. LNG receipts into Europe should ramp up again due to a waning opportunity to arb European cargoes into Asia, which will not help pare the current oversupply amid stocks nearing maximum capacity. The necessary drop in supply will therefore need to come from Norway or Russia. Quicker LNG port receipts and storage nearing capacity should force September and October gas prices to the fuel switch parity trigger, barring any unusually cold weather in October that could help soak up demand.
We expect that the TTF Sep-19 price will remain at or below the fuel switch parity trigger, which was 10.77 €/MWh on 19 August. It is looking increasingly clear that stocks at record highs will require another sharp drop in September supply for the market to balance. The recent y/y cuts to Norwegian and Russian pipeline supply, which propped up prices in the first half of August, provided little support to prices last week. On 14-16 August, the M+1 contract edged below the fuel switching parity price for the first time since the start of the month.
We forecast that Europe will inject about 2.6 bcm into storage in the two weeks to 30 August, cutting the y/y storage overhang to around 18.5 bcm by 1 September. A significant 7 bcm more of the y/y storage surplus would then still need to be cleared in September or storage would otherwise be full. The supply-demand balance loosened further last week after working gas capacity at Germany’s Astora site was revised down by 0.5 bcm to 4.2 bcm, cutting European injection demand.
Europe will need to see a sustained slowdown in pipeline supply through next month in order to balance, even assuming nearly full coal-to-gas fuel switching. The drop y/y in Norwegian supply— with the slowdown in flows now well on course to exceed the scheduled y/y August cuts—has been key to Europe balancing this month, and these strong y/y losses will need to continue into September. The rally in European D+1 prices at the end of July and start of August coincided with a slump in the Sum-20 contract. That could indicate that Equinor—faced with prompt prices at a record-wide discount to the front-summer—opted to withhold prompt supply and sell into the summer 2020 delivery period.
The fact that the M+1 price is now holding at the fuel switch parity trigger despite strong signs of Norway deferring gas supply to 2020 is an indication of how oversupplied September looks. The Sum-20 contract has moved to a discount to the Sum-21 contract, with the spread settling at -30 cent/MWh on Friday (16 August), from -15 cent/MWh on 9 August. The spread is still narrower than the -40 cent/MWh at which it peaked at the end of June, but not by much. The Sum-15-Sum-16 spread widened much more in 2014, when European spot prices in deep contango vs the curve led Equinor to defer delivery into the front summer. The wide Sum-15-Sum-16 spread from 2014 suggests there is ample room left in the Sum-20-Sum-21 spread for additional deferrals.
|Fig 1: TTF Sum-20-Sum-21 spread, €/MWh||Fig 2: NW European LNG port receipts, bcm, y/y|
|Source: Argus Media Group, Energy Aspects||Source: Kpler, Energy Aspects|
European LNG receipts could strengthen
Tighter Northwest European M+1 discounts to LNG markets in Northeast Asia and a recent rise in freight rates may discourage European reloads in the coming weeks and further increase Europe’s net supply. Higher freight costs should also encourage more Atlantic basin LNG supply to head to Europe. This would add to pressure on Europe’s pipeline suppliers to curb deliveries.
There are still some limited opportunities to deliver to South Asia, with Pakistan LNG and Indian refiners issuing tenders for September-December delivery. But the tenders to date have not indicated any substantial growth in spot demand from a year earlier. These markets would therefore not provide significant scope for reloads from Northwest Europe, which would in any case be competing with spot supply from other sources in the Atlantic basin or Middle East.
A rise in freight rates from a recent low in late June will also discourage supply from the Atlantic basin being sent long distance to markets in Asia. It will likely also favour more US supply being sent to Europe ahead of Asia. And US supply will be boosted by the return of two trains at Sabine Pass next month, the completion of testing for Corpus Christi train 2 and the start of operations at Elba Island, where its 10 trains will ramp up sequentially over the coming months to the plant’s 2.5 mtpa nameplate capacity.
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|