Northwest Europe will require large drops in pipeline supply over the next few weeks for the market to balance. It is mostly Russia that will have to lower supply, given the new Norwegian Johan Sverdrup field will be ramping up through the rest of October. But even if there are hefty y/y drops in Russian supply, prompt prices at a contango to the front-summer provide an incentive for Europe to enter December with stocks near capacity. We expect the Q1-20 and Sum-20 contracts to retain most of their current risk premium until there is clarity on a Russian transit deal through Ukraine and the risk of cold weather recedes. A loose prompt market and rapidly filling stocks could well lead the Nov-19-Dec-19 spread to widen further, although we think it would narrow if weather forecasts start indicating a cold start to November.
The October balance depends on lower pipeline supply
Weather forecasts indicate that HDDs will be higher y/y over the next two weeks—providing a limited y/y boost to LDZ demand—but still lower than the past five-year average. Without much heating demand to absorb supply, Europe will continue to inject into very full storage facilities. We have seen indications that some storage levels are above nameplate capacity and that suggests that rather than EU storage finishing the injection season up by 13 bcm y/y (including the 1.0 bcm extra allowance to use at Norg), it looks likely to finish more than 14 bcm higher y/y. Add in another 3 bcm of gas in Ukraine’s gas customs warehouse, then there is actually a 17 bcm storage surplus y/y to start the withdrawal season.
Swelling LNG stocks should push Q4 19 supply even higher. There were three laden LNG carriers—the Golar Arctic, Marvel Eagle and Marshal Vasilevskiy—floating near the Netherlands' Gate terminal on 7 October. The shippers owning the cargoes are likely using the vessels as storage to profit from higher prices available later in the winter. There is still ample incentive to store the cargoes until Q1 20. But Gate sendout would have to quicken substantially if they unload in the coming weeks, given that the terminal's storage was 82% full on 7 October. The combined capacity of the vessels equates to 0.28 bcm of pipeline supply. Between record-high underground storage and floating storage, even if there was not an expected winter 2019-20 of incremental LNG supply, the market would look very comfortable going into the withdrawal season.
For the next two weeks, a forecast return to above-normal temperatures and weak demand means that supply will need to drop in order for the market to balance. Europe has 3.4 bcm of available nameplate storage capacity (including Norg) which is slightly more than we had expected a couple of weeks ago, due in part to some facilities injecting above nameplate capacity. With LNG supply on course to be higher y/y at the end of the month, it will be a challenge to avoid breaching storage nameplate capacity unless pipeline supply turns down by more than we have seen so far this month. Even with an average 63 mcm/d y/y slowdown in Russian pipeline supply into Northwest Europe, a considerably more aggressive y/y cut than seen last week, we forecast that the region will inject nearly 0.7 bcm into storage in the two weeks to 18 October. Injecting at that rate would leave roughly 1 bcm of spare working gas capacity in NW Europe for the final two weeks of the month, excluding Norg. While there should be some limited spare storage capacity available at the end of the month, the market will still need to price in as much gas into power as it can. Storage injections will need to be faster if the turndown in Russian supply is not strong enough to tighten the supply-demand balance.
Norwegian flows edged up over the past weekend (5-6 October) as seasonal maintenance constraints eased, but we still expect Norwegian flows to remain about 16 mcm/d lower y/y over the next two weeks, as weak D+1 prices in contango to the forward curve encourage lower output from Troll. The drop in Norwegian pipeline supply is likely to ease from mid-October, owing to the ramp-up of the new Johan Sverdrup field, which came online over the weekend and is expected to add 2-4 mcm/d of incremental supply this quarter.
Q1-20 still contains risk premium
We still expect the Q1-20 and Sum-20 contracts to retain some risk premium until there is more clarity on whether Russian gas will transit Ukraine next year. However, exceptionally high stocks should begin to erode some of the cold-weather risk premium in the Q1-20 contract in the coming weeks. The next round of talks between Gazprom and Naftogaz are scheduled for 28 October. However, with the two sides still far apart in terms of what they want from the deal, it would be surprising if we saw an agreement announced at that meeting. With that risk likely to be present in the market for a while longer for the Q1-20 contract, the front-month contract is being pulled down by the very loose prompt market. As a result, the contango at the front end of the curve has started to widen, with the Nov-19-Dec-19 spread closing Friday at -1.75 €/MWh, out from -1.2 €/MWh in mid-September. The prompt has dropped because of the forecast for unseasonably low HDDs—D+1 prices are now sub-11 €/MWh—and those low prompt prices and rapidly filling storage will weigh on the Nov-19 contract.
Still, while the transit risk is in place, the market will hedge its bets by limiting how much additional gas into power should be priced into merit in November to ensure that more gas is kept in storage to deal with any potential Q1 20 supply disruption. What this likely means is that as we get closer to November and the 14-day weather outlook starts to cover dates in early November, a forecast for cold could well support the Nov-19 contract and that would likely narrow the Nov-19-Dec-19 spread.
|Fig 1: Russian supply into Europe, bcm/d||Fig 2: TTF Nov-19-Dec-19 spread, €/MWh|
|Source: Country SOs, Energy Aspects||Source: Argus Media Group, Energy Aspects|
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|