TTF prompt prices have recovered from last week’s 13-year low, supported by an extension of maintenance at Troll, which has helped tighten supply. Despite a hefty sustained drop in pipeline supply, injection rates still point to storage reaching maximum capacity by the end of September. Even that would require Equinor to keep deferring September Troll volumes, which we expect. A good indication of how curtailed Norwegian supply will be this month will come from how much gas Troll flows when its maintenance events ease on 13 September. With longer-term forecasts calling for warmer-than-normal weather in October, European M+1 prices will need to fall to the point that encourages full coal-to-gas fuel switching in order to balance the market. That should widen the Q4 19-Q1 20 spread unless Russia and Ukraine negotiate a transit deal next week, which we think is improbable that soon. In the unlikely event that a deal is reached next week, the Q1-20 price should shed much of the risk premium it has held this summer.
Lower pipeline supply tightening the balance—but will it last?
A sharp drop in Norwegian and Russian supply is now consistently offsetting higher LNG supply into Europe, but that may only last for one more week. As we have said previously, the precise date on which European stocks reach maximum capacity—and the bearish effect that has on the Oct-19 price—will depend on how much pipeline supply falls over the rest of September. For now, we forecast that aggregate supply will rise y/y in the week starting 14 September, putting total European storage on track to fill by the end of the month.
The recent drop in Norwegian supply has been moderately greater than we anticipated, owing to extended maintenance works. Troll was initially expected to return from a full 0.12 bcm/d shutdown last week, with constraints of just 43 mcm/d on 5-12 September. However, the field’s production has instead been constrained by 70-114 mcm/d because of a delay to completing the maintenance. As a result, total Norwegian flows have been a considerable 0.13 bcm/d lower y/y since 5 September, the deepest y/y cut this summer so far, tightening a very loose supply-demand balance and supporting prompt prices.
Providing further support to prices, a full shutdown is scheduled to halt flows into the UK’s 71 mcm/d Easington terminal on 10-24 September, meaning gas that would otherwise be monetised through the Langeled pipeline will not have a route to market. With prompt prices still at multi-year lows, there is still little incentive to quickly ramp up Troll production from 13 September, when the Troll maintenance restrictions are scheduled to end.
For 3-30 September, Norwegian maintenance constraints are currently scheduled to be 3 mcm/d heavier y/y. Norwegian supply reductions since mid-July have tended to be greater than that implied by the Gassco schedule. So even if Norwegian pipeline flows are 20 mcm/d lower y/y (which is our base forecast) and Russian supply continues to post a 30 mcm/d y/y decline, Northwest Europe will inject 2 bcm into storage by 20 September, leaving just 0.6 bcm of spare capacity for the rest of the injection season. In other words, total European stocks would likely reach capacity by end-September.
We would need to see an even greater deferral of Troll volumes than the 20 mcm/d fall in Norwegian flows that we currently forecast, or a heavier drop in Russian supply over the next two weeks, if Europe is to enter October with any spare storage capacity. So far, weather forecasts indicate that October will be just a touch warmer than the seasonal average. Without heavy heating demand to soak up supply, it will fall to the power sector to balance the market, which should force the Oct-19 price down to at least the fuel switch parity trigger, which closed Friday at 11.1 €/MWh. In turn, that should further widen the Q4-19-Q1-20 spread, which is currently trading around 2.50 €/MWh, just shy of the peak close of 2.60 €/MWh from late August.
|Fig 1: Norwegian pipeline flows, bcm/d||Fig 2: Norwegian production, y/y, bcm|
|Source: Gassco, Energy Aspects||Source: NPD, Gassco, Energy Aspects|
Russia-Ukraine talks: Deal or no deal?
One factor that would narrow the spread would be if Russia and Ukraine are able to strike a transit deal, but the chances of this occurring next week are slim. The first of the new round of trilateral talks between Russia, Ukraine and EU participants is now scheduled for 19 September. As we have discussed previously, Russia and Ukraine are entering these negotiations with plenty of recent difficult history and very different starting points regarding what the new guaranteed annual contract volume for transit should be. Gazprom has indicated a number around 10-15 bcm/y (around 10% of the current volume), while Naftogaz is looking for something like 70-80 bcm/y. With the EU hoping for something in the middle, around 40 bcm/y, as a compromise, this does not feel like a negotiation that will be resolved quickly. As a result, we expect the Ukraine transit risk, which is currently imbedded in Q1-20 contract prices, to persist through September. The most important thing coming out of the next meeting will be to gauge just how far apart these sides really are and how long these negotiations might take. We do retain our expectation that something will eventually be agreed to allow Russian gas to flow through Ukraine in Q1 20.
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|