A significant y/y drop in Norwegian and Russian flows is helping the European gas market balance as injection capacity shrinks, but rising LNG supply promises to keep the winter supply-demand balance loose. There has been another uptick in floating LNG storage near European terminals over the past week, which should add to LNG supply in late Q4 19. We expect the M+1-Q+1 spread to widen as those bearish fundamentals weigh on the prompt while the Q1-20 and Sum-20 contracts remain propped up by concerns over Russian gas transit through Ukraine.
Prospect of rising LNG supply should outweigh weather risk
For at least the next fortnight, the market will be locked into a pattern whereby forward prices extending from the M+2 contract to Sum-20 will stay at a wide premium to prompt prices, which will stay low under the weight of a very loose supply-demand balance. The M+1 contract should gradually soften to the 5% fuel switch trigger (at which gas-fired plants with a 5 percentage point efficiency advantage over coal-fired plants are in merit) as it approaches expiry. The Oct-19 contract followed a similar pattern in September. That means that the Nov-19 contract will need to fall by a considerable 2.37 €/MWh—taking into account prevailing coal and carbon prices—before the end of this month, for the 5% trigger to be reached. If weather forecasts indicate that November will be mild, prices could dip below the 5% fuel switch trigger by the end of this month, to support more power sector gas burn.
Contracts extending from the M+1 through 2020 are still pricing in some possibility of a 2020 halt to Russian transit through Ukraine, which is driving the steep contango in the market. Although we maintain that a deal on transit is more likely than not, the market is unlikely to remove all of that risk premium from contracts until an agreement is certain. The next round of Naftogaz-Gazprom talks is not scheduled until 28 October and we do not expect an agreement will be reached at that round. However, any progress made towards a deal in October could lead the market to reduce some of the risk premium currently held in contracts.
In the meantime, there are few factors that could provide upside to prices aside from the usual winter weather risks that could increase demand or a sharp drop in pipeline supply. For the rest of October, a more material uptick in early winter LDZ demand is unlikely to be on the cards, with forecasts to the end of the month pointing to higher-than-normal temperatures.
The number of laden LNG vessels stationary near the Dutch Gate terminal rose by one to a total of four over the last week, with the high level of contango in the curve still encouraging floating storage.
With storage at the terminal itself being close to capacity, sendout would need to ramp up considerably in order to make space for incoming deliveries this month However, Gate storage capacity holders will be reluctant to increase sendout while prompt prices are posting such a considerable discount to forward contracts. With the TTF prompt discount to the Q1-20 contract more than offsetting the cost of freight, LNG sendout in November and December is likely to rise as the number of floating cargoes increases.
We have long maintained that a sharp reduction in pipeline supply would be necessary to balance the market in early Q4 19 and it now appears that lower Norwegian and Russian flows are providing some limited support to gas contracts. Northwest Europe injected just 0.12 bcm last week—substantially less than our forecast of 0.44 bcm—owing to a much stronger reduction in Norwegian flows than we expected. Norwegian deliveries into Europe were 0.85 bcm lower y/y over 1–13 October. Only some of that loss—roughly less than half— was attributable to unplanned maintenance constraints, indicating that the rest of the loss was because of lower y/y production from flexible fields.
Russian supply was consistently lower y/y through Q3 19, as contract nominations fell steeply owing to lower storage injection demand. Flows remained down y/y at the start of October, only to rise y/y by an average of 24 mcm/d for several days last week. Russian flows returned to posting y/y losses over the past weekend, but strong y/y reductions are far from guaranteed. Low prompt prices do not seem to have deterred fairly heavy selling on the Electronic Sales Platform, with more of these volumes being sold into the southern markets.
We expect Norwegian supply to continue to post y/y losses through the rest of the month on low prompt prices. But even taking these cuts into account, we expect Northwest European storage sites to reach nameplate capacity by 25 October and total EU storage to end the month just shy of 100 bcm.
|Fig 1: NW European LNG port receipts, y/y, bcm||Fig 2: TTF Nov-19-Q1-20 spread, €/MWh|
|Source: Kpler, Energy Aspects||Source: Argus Media Group, Energy Aspects|
Norwegian maintenance: Deep cuts in summer 2020?
Gassco added another 1.5 bcm of production and delivery capacity constraints to its summer 2020 maintenance schedule on Friday, pushing total constraints to 5.2 bcm next summer. Summer 2020 constraints are now 0.3 bcm heavier than the average 4.9 bcm of cuts in the previous summers of 2016–2018, although 3.3 bcm less than in 2019. It is rare for Gassco to post a forward summer maintenance schedule so early in winter. Given that the company typically adds further constraints later in the season, this could imply that Norwegian maintenance will be heavy next year, similar to summer 2019. Friday’s maintenance additions supported the Sum-20 contract, narrowing the Sum-20-Sum-21 spread. We expect this spread to continue to narrow if there are further signs that heavy maintenance will keep Norwegian production lighter next summer.
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|