Scant injection demand and high LNG supply will weigh on prices in October, pushing TTF D+1 prices to the point where coal-to-gas fuel switching is maximised. But how loose the October supply-demand balance will be will depend heavily on how much gas is produced by Norway’s flexible Troll field. With just 2.4 bcm of European storage injection capacity left in October (-2.2 bcm y/y), and prompt prices posting a heavy discount to forward contracts, we expect there will be an incentive to defer October Troll volumes, an unusual occurrence for the time of year. If Troll production is instead in line with the typical October average, higher Norwegian supply y/y will further loosen the supply-demand balance and weigh further on prompt contracts extending through Q4 19.
Will Norwegian supply tighten or loosen the October balance?
Norwegian flows typically ramp up in early October, but that may not be the case this year as European demand will be muted by at least 2.2 bcm y/y in October given limited unfilled storage capacity. Low prompt prices should discourage production from flexible fields like Troll and Oseberg. The TTF Oct-19 was trading at a hefty 5.25 €/MWh discount to Sum-20 this morning (30 September) and we expect that D+1 prices in October will trade at an even wider discount to the forward curve. Unless the weather turns unusually cold, which is not the prediction of 15-day forecasts, stronger LNG supply y/y and scant storage injection demand will continue to leave the supply-demand balance loose, pushing prompt prices lower to encourage more power sector gas burn.
Production and pipeline flows suggest that Equinor has already deferred Troll volumes in Q3 19. Aggregate Norwegian production (including Snohvit) in Q3 19 was around 8.0 bcm per month. Assuming peak summer production from Troll of around 0.11 bcm per month and all other Norwegian fields producing at maximum capacity, aggregate summer output would max out around 10.8 bcm. Scheduled maintenance constraints in Q3 19 amounted to 2.0 bcm per month. Aggregate Q3 19 Norwegian production was an average 0.7 bcm/m less than the scheduled maintenance constraints would have allowed, with the difference likely to be due to a voluntary reduction in production from Troll. A total of roughly 2.1 bcm of production from Troll was likely deferred in Q3 19, with the most significant deferrals of 1.1 bcm in September.
Some market participants have suggested that October Troll output will need to be strong because the 2.1 bcm of deferred summer 2019 gas will need to be produced before the end of next summer. If that were the case—and we think it is not—the current schedule for summer 2020 maintenance constraints leaves little room for summer 2019 deferred gas to be produced, and October 2019 production would indeed need to be strong.
Equinor has never said that deferred volumes must be produced the following summer, only that deferred gas is sold into ‘future periods’. Given that the field typically produces near maximum capacity in winter, the summer is typically the only period when there is capacity to produce deferred volumes. But the prospect of a loose summer 2020 supply-demand balance is weighing on the Sum-20 contract. The Sum-20 contract dropped below the Sum-21 contract on 23 September and the spread has since widened to 17 cents/MWh, which as of yet provides little incentive for Equinor to push all 2.1 bcm of supply into the front summer.
It is questionable whether Equinor has indeed sold all of the 2.1 bcm of deferred volumes further forward. The firm has ‘overproduced’ from Troll against the field’s cap in five out of the last six gas years, suggesting that the Troll cap is far from rigid. Only in the 2013-14 gas year did Equinor underproduce against the then 30 bcm cap, by 2.8 bcm. Production was indeed much higher against the cap the following gas year (+4.4 bcm), suggesting that some volumes originally earmarked for summer 2014 were instead produced in summer 2015. But the market was expected to be tighter in summer 2015, with the D+1 price that summer averaging a 29 cents/MWh premium to the front summer.
Equinor has previously emphasised that its European sales strategy is to pursue a ‘value over volume’ approach. Taking this into account, paired with the assumption that volumes deferred this year are under no obligation to be produced solely in summer 2020, the wide prompt-forward curve contango would suggest that Troll production this October will remain muted. We expect that production from Troll will average no more than roughly 88 mcm/d in October, down by 24 mcm/d y/y. However, we expect aggregate Norwegian pipeline supply to remain broadly flat y/y, as incremental production from new fields (Aasta Hansteen, Johan Sverdrup) would add around 23 mcm/d, offsetting most of that loss at Troll.
|Fig 1: Troll production, bcm||Fig 2: Norwegian production, y/y, bcm|
|Source: NPD, Energy Aspects||Source: NPD, Gassco, Energy Aspects|
If Troll production does remain strong in October—broadly flat y/y at 0.11 bcm/d—that would push October Norwegian flows about 0.7 bcm higher y/y than our current forecast. And given that we already expect LNG supply to be roughly 2.8 bcm higher y/y in October, and European injection demand to be 2.2 bcm lower y/y, that would leave the aggregate supply-demand balance about 5 bcm y/y looser.
As we reach the expiry of the Oct-19 contract, the big gap between where the contract looks like it will expire and the prompt D+1 price does suggest some considerable risk premium in the October contract. With the current two-week forecast giving no indication of very cold weather over the next two weeks and storage injections having slowed considerably due to very full storage facilities, there seems little to justify an October risk premium. Given the risk that Norwegian supply is likely to begin to rise this week w/w as we transition out of the summer maintenance period, an average TTF price above the parity fuel switch trigger seems to be overpriced, even if Equinor is unlikely to offset all of the summer deferrals. More interesting now for the market is even if the D+1 prompt does start to drop below the parity fuel switch level (which is around 11.4 €/MWh), does this weakness start to affect Nov-19? We think it will probably have to and points to, at the very least, a widening of the Nov-19-Dec-19 spread.
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIe, Energy Aspects|