The TTF Oct-19 began today’s session (2 September) trading lower following last week’s price spike and we expect the contract to continue softening given that our forecast market balances still show a very loose supply-demand balance next month. We expect storage to reach maximum capacity no later than the last week of September, leaving no injection capacity in October. Weather forecasts indicate mild weather in October, so demand will need to come from the power sector or supply will need to turn down y/y. Some supply loss y/y will come from lower Russian supply in September and possibly October, but Norwegian flows are likely to be at least flat y/y in October, even if some Troll volumes are deferred that month. With incremental LNG deliveries adding to supply over these two months, the Oct-19 contract could well be pushed to the fuel switch parity trigger, which is currently at 10.7 €/MWh.
Norwegian volumes – deferrals on the menu?
A storage injection of 1.3 bcm last week has left the EU gas market with just 5.9 bcm of available storage capacity for the remaining injection season. The volume of Norwegian flows will be a significant factor in determining how fast storage fills this month, and if Europe will enter October with any residual injection demand. Last week’s relatively large injection occurred amid Troll being out on maintenance. That field is scheduled to come back on 5 September from a full shutdown. The subsequent ramp-up in Norwegian pipeline deliveries should provide a better idea of how much September production from Troll might be deferred into future periods. Norwegian flows in August were on average 24 mcm/d lower than the scheduled maintenance cuts had indicated flows might be, and we expect September flows to be around 10 mcm/d lower than the heavier scheduled maintenance cuts y/y would suggest. Even with lower Russian and Dutch pipeline supply y/y, that level of supply would put aggregate storage on track to hit maximum capacity by end-September.
The likelihood of a lack of any meaningful injection capacity in October will further weigh on the Oct-19 contract, especially given current weather forecasts calling for an above-average chance of mild weather in October. The mildest October out of the past five years was in 2018. Another mild October could mean res-com demand is largely flat y/y, leaving the market to continue to rely on additional demand from the power sector to soak up supply. Europe will need to find a way to offset the loss in demand from the 4.6 bcm of gas that was injected into storage in October 2018.
Even if mild weather encourages Equinor to turn down Troll production well below the field’s 0.12 bcm/d maximum capacity next month, aggregate Norwegian flows are unlikely to be significantly lower y/y given production from new fields. Troll does not always produce at full capacity in October.
Equinor has reduced supply from Troll on days when mild weather in October has dented LDZ demand. In previous years, Equinor has also constrained flows from Troll for very short periods in early October for maintenance reasons. Troll output has averaged between 0.09-0.11 bcm/d in October in the past five years. If supply from all other Norwegian fields is largely flat y/y in October 2019, Troll production of 88 mcm/d, at the lower end of that range, would leave Norwegian pipeline flows around 0.29 bcm/d, a y/y reduction of 25 mcm/d. However, incremental supply from Aasta Hansteen, which is already producing just under peak production of 23 mcm/d, would push flows broadly back to the same 0.31 bcm/d pace from October 2018, keeping October 2019 well-supplied.
|Fig 1: Troll production, mcm/d||Fig 2: Russian flows into Europe, bcm/d|
|Source: NPD, Energy Aspects||Source: Country SOs, Energy Aspects|
Russian flows to continue to dip?
A continued turndown in Russian flows is likely to be another key factor to get the market to balance in the coming two months. Gazprom said last week that it expects 2019 sales to Europe and Turkey to drop by 4-10 bcm y/y. Over Q1 19 to Q3 19 so far, Russian flows to EU markets have dropped by 2.7 bcm y/y, with flows through Romania down by 5.3 bcm (with lower Russian flows to Turkey driving that), more than offsetting net gains through other routes. A 10 bcm y/y drop (at the high end of Gazprom’s range) would put total 2019 sales at 192 bcm, with August-December sales needing to be 80.4 bcm, 5.3 bcm lower y/y. Even if around 2 bcm of that decline comes from lower Turkish sales, that would still leave a large 3.3 bcm y/y decline in sales to the rest of Europe over the rest of 2019.
The month in 2019 so far with the largest y/y drop in Russian volumes was August, in which flows fell by 2.8 bcm y/y. We think an similarly large y/y drop is likely in September, with the combination of heavy selling on the Electronic Sales Platform (already at 1.2 bcm for September delivery) only partially offsetting the reductions we expect in contract nominations. The guidance Gazprom gave, of a 4-10 bcm y/y drop, is a wide range and seems to be a case of almost second-guessing how much contract nominations are going to drop over the rest of 2019. The start of a new gas year in October is when customers will at least want to nominate in line with annual contract quantities, which means there is potential for y/y reductions in Russian supply to come in more towards the lower end of that range.