Loose and low

Published at 16:29 28 Oct 2019 by

European prompt prices should ease this week with fundamentals pointing to a further loosening of the November supply-demand balance. However, European forward contracts extending from Q1-20 are likely to retain most of their risk premium if—as we expect—little progress is made in today’s Ukraine-Russia transit talks. A higher chance that South Korea will halt some peak winter coal-fired generation should partially tighten a loose global supply-demand balance, providing some limited support for TTF Q1-20 contracts. We forecast that Europe will move to making net storage withdrawals next week, but these will be limited by prompt prices currently holding a discount to the Sum-20 contract.

Abrupt shift in early November weather  

European heating and power sector gas demand in November should be lower than previously expected. Weather forecasts were revised on Monday morning (28 October) to indicate above-average temperatures for the first week of the month, compared to forecasts on Friday that pointed to an unseasonably cold start to November. Any remaining price risk associated with the possible full-winter 2019–20 halt of EDF’s 5.8 GW of affected nuclear capacity has now been unwound, following the French nuclear regulator’s announcement that the plants do not require an immediate shutdown (see E-mail alert: EDF will not halt 5.8 GW of French nuclear capacity, removing additional gas demand risk, 24 October 2019). 

While demand looks softer, European November–December gas supply could be higher than previously expected. An outage at PetroChina’s 6.2 Mtpa Rudong terminal, which has curbed Chinese LNG imports since early October, now appears likely to extend into December, having previously been expected to end in November (see E-mail alert: Outage at China's Rudong LNG terminal to tighten JKM-TTF spread, 3 October 2019). The Rudong outage will reduce Chinese imports by about 0.51 Mt per month, increasing the number of cargoes offered in the global LNG spot market. At the same time, European LNG stocks have continued to climb, with facilities in some countries (including the UK, the Netherlands and Spain) nearing maximum capacity. The need to free up some tank space to allow new cargoes to unload should encourage stronger sendout. The UK’s Isle of Grain terminal is scheduled to receive five cargoes over the next fortnight, requiring sendout on 1-8 November to rise by 13 mcm/d y/y to make room for receipts.

The number of laden LNG vessels stationary near the Dutch Gate terminal has remained unchanged at two over the past week. However, with TTF D+1 prices retaining a 5 €/MWh discount to Dec-19, laden LNG cargoes should still be incentivised to float in European waters. As of Monday morning, Kpler data showed 12 LNG carriers floating in West of Suez waters near to Europe. Another three vessels were floating in Middle East waters, with some optionality as to the destination.

Any movement on transit?

The second meeting between the EU, Naftogaz and Gazprom over the transit agreement for Russian gas is taking place on Monday. Given that the last meeting seemed to be more about introductions and scene setting, it seems unlikely that a final transit agreement will be announced on Monday. Instead, it is likely snippets will emerge, suggesting that some progress was made but that the parties still disagree on key parameters. The only potentially market-moving news would be if Naftogaz agreed to the Gazprom offer to roll over the existing contract for at least Q1 20, buying some time for the negotiations on longer-term transit issues. If that does happen, some of the risk premium in 2020 contracts will likely be unwound. 

What remains uncertain is what happens to the 55 bcm/y Nord Stream 2 (NS2) project if the parties agree a short-term extension to the negotiation deadline. Denmark was supposed to make an announcement on 15 October regarding the environmental impact assessment (EIA) that Gazprom had submitted for the southern proposed route around the island of Bornholm. However, that announcement has not yet come although the Danish Energy Agency on 25 October approved the 10 bcm/y Baltic Pipe project, which will transport gas from Norway through Denmark and into Poland. The project has both onshore and offshore sections and was given the go-ahead to pass through Denmark’s territorial waters. The Baltic Pipe is due to come on-stream in 2022.

The Danes have made it clear that approval of NS2 is dependent on a guarantee of longer-term gas transit through Ukraine. While law of the sea convention stipulates that the Danes should have decided on the EIA after six months, there is little NS2 can do aside from taking Denmark to court. However, any court case would take time and approval would likely be forthcoming anyway once a transit agreement is reached. Given the impasse on long-term transit, a short contractual rollover would likely be insufficient to trigger a Danish announcement. NS2 has suggested it could avoid Danish waters altogether, which would add around 34 km to each leg of the pipeline. This would likely involve deeper waters and it is clear NS2 would rather not be sent down that route.

Fig 1: UK LNG receipts, bcm, y/y Fig: TTF D+1-Dec-19 spread, €/MWh
Source: Kpler, Energy Aspects Source: Argus Media Group, Energy Aspects

Contango is easing but only a little

TTF winter 2019-20 contracts softened through Monday morning on revisions to 14-day weather forecasts. As a result, the D+1-M+1 spread dropped to below 4 €/MWh. With Nov-19 close to expiry, current D+1 prices around the parity fuel switch trigger—despite a colder-than-normal end to October—are dragging the M+1 contract down. With the 5% fuel switch trigger at 13.10 €/MWh, Nov-19 still has a way to fall if milder weather forecasts prevail over the next few days.       

While the contango at the prompt end has narrowed, the Nov-19-Dec-19 spread has stayed around 1.50 €/MWh, suggesting little change in market signaling. The Nov-19-Sum-20 spread is now wider than -1 €/MWh and, with that discount in place, there remains little incentive to make net storage withdrawals. For November, we expect Northwest European storage withdrawals to remain reasonably low, with a forecast net stockdraw of 0.57 bcm on 2-8 November. With end-October stocks forecast at around 98 bcm, that holds out the prospect of ending November with a roughly 14.5 bcm y/y storage overhang. We remain very bearish for the next two weeks compared to where Nov-19 is currently trading.

Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm
Source: Country SOs, GIE, Energy Aspects





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