Hub merger and summer injection demand may boost German liquidity in 2021

Author: Arlind Neziri

2021/01/22

LONDON (ICIS)--German over-the-counter (OTC) traded volumes increased by 24% year on year in the fourth quarter of 2020 reaching a total of 685TWh on both hubs, according to ICIS data.

Liquidity was boosted as trading activity for annual contracts on the NCG more than doubled.

It is possible to expect that liquidity will continue to grow in 2021, benefitting from higher summer injection demand due to significantly emptier storage tanks, the hub merger set for 1 October, and the potential completion of the Nord Stream 2 and EUGAL pipelines.

SUMMER DEMAND

With German storage sites currently 54% full and likely to get emptier by the end of the gas winter, injection demand is set to be significantly greater this summer compared to 2020 where stocks ended winter 75% full.

Expectations of greater gas injection demand can be seen in increased activity on the Summer ‘21 contract in the final quarter of 2020, where NCG volumes were up 6.21TWh to 41.92TWh, with GASPOOL volumes up 13.53TWh to 32.85TW, compared to the year before.

Storage withdrawals have been driven by lower Norwegian gas flows into the country, which are likely to continue in the short term as a strong NBP prompt and front month premium to the German hubs continues to divert flows away from Germany.

So far this year, German imports of Norwegian gas have averaged 39.4 million cubic meters per day (mcm/day), down from 75mcm/day across November and December, whereas UK imports have climbed from 104mcm/day in November-December to 123mcm/day in January.

Greater demand may boost liquidity on contracts expiring in the summer months, along both the prompt and curve.

HUB MERGER

Germany’s two gas market hubs is scheduled to merge on 1 October 2021 to create Trading Hub Europe, to create a single gas hub for Europe’s largest physical has market.

The NCG and GASPOOL market areas are the third and fourth most liquid hubs in Europe after the Dutch TTF and British NBP hubs, though the gap remains large. Supporters of the merger hope that the consolidation of the two hubs will help grow liquidity in Europe’s largest physical gas market, to make up the gap with the TTF and NBP.

The prospect of the merger helped liquidity on annual contracts at the NCG hub more than double to 151TWh in the fourth quarter, though the corresponding GASPOOL contracts did not benefit from the same boost.

EUGAL AND NORD STREAM 2

The construction of EUGAL and Nord Stream 2 is expected to increase Russia’s direct transport capacity to Germany by 55bcm/year.

This could also support liquidity particularly after the hub merger in October, helping to increase Germany’s role as the reference price for the surrounding markets.

However, both projects have suffered delays. EUGAL is now expected to reach full capacity on 1 April, as delays in the construction of the pipelines second string meant the original deadline of 1 January was missed. Completion of the second string will increase transport capacity to 55bcm/year, to transport gas from Nord Stream 2. Current capacity with just the first string filled is 30.9bcm/year.

The completion of Nord Stream is less certain, following the US government’s sanctioning of the Fortune pipelaying vessel, the last vessel left in the Nord Stream 2 project.

Pipelaying of the Nord Stream 2 pipelaying in the Danish Exclusive Economic Zone was set to begin 15 January but has not yet done so. This marks another set back for the pipeline which was originally expected to be operational in 2020 but was delayed as US sanctions imposed in December 2019 paused work.