European storage and gas flows

Published at 12:42 7 Sep 2015 by . Last edited 09:30 20 Apr 2016.

The downward pressure on European gas markets continued to relent. Prices saw some modest support from a cold start to September and a couple of short-lived Norwegian outages. Maintenance developments, which saw Emden return and St. Fergus (Vesterled) go out of service until the 22 September, helped shift some of the geographical spreads.

A fair amount of chatter in the market this week concerns the 3.2 bcm auction of winter gas by Gazprom that has attracted some 39 different pre-qualified bidders. Gazprom is confident the gas will have a higher price than that prevailing in its long term contracts. NBP winter gas is currently around 44.55 p/therm, and most bidders are likely to want something of a discount on that price, providing some confirmation of how low contract prices have fallen. The bidding is spread out over four days, and we expect this will result in selling along the curve by successful bidders over the week—providing some downward pressure on winter 15-16 prices.

Another intriguing development last week was the decision by Gazprom and five western European partners (Eon, Engie, BASF, OMV, Shell) to sign a shareholders agreement for the 55 bcm/y Nordstream-2 pipeline. A shareholders agreement does not necessarily translate into a final investment decision (FID), but the project raises some issues for European gas markets. In particular, it appears to enhance the security of supply of the EU, at the expense of the security of supply of Ukraine. It also indicates that Russia still views European gas markets as its core export market, suggesting a future of fairly robust price competition. The project has no real defined timelines associated. It is unclear if a FID will be taken before the project receives regulatory approval in the EU. Such approval has recently been difficult to secure and suggests the project will not by operating any time before 2020.

For the week ahead, there are again more bullish drivers for the NBP than for the continent, with UK temperatures set to be lower and likely to add around 0.06 bcm of demand y/y. The Vesterled outage will continue to constrain supplies, as will an outage at the BBL that runs to Wednesday. The continental balance story is less supportive, as demand will be marginally down y/y. The prompt will have little reason to move outside of the 38-43 p/therm range. But a move back below 40 p/therm seems unlikely, given temperatures that will still feel cool. Along the curve, we expect the winter-15 contracts to come under pressure from the 3.2 bcm of gas being auctioned. Continental contracts should see a bigger impact from the sales, and the NBP October contracts could flip to a premium to the TTF.

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