GAS OUTLOOK: Storage the last line of European flexibility

Thomas Rodgers

25-Jan-2021

• Asian premium to limit European cargoes

• Russia and Norway demonstrate little willingness to up flows

• Early indications for cold February

LONDON (ICIS)–European stored reserves will remain the key source of flexibility to meet natural gas demand through late January and into February.

Despite falling back from record highs, East Asian spot LNG prices (EAX) for delivery through to March continue to hold a premium that keep most cargoes away from Europe.

With Norwegian flows close to their winter capacity and pipeline bookings suggesting Russian flows are unlikely to climb in the near term, shippers will use storage to match demand patterns.

This will likely mean the volatility that rocked European markets should persist through February, with reduced supply flexibility limiting the number of offers in the market.

DEMAND EXPECTATIONS

In its sub-seasonal forecast on Friday MetDesk said there was an increasingly likelihood for a more prolonged cold spell around the early and middle of February, with confidence low for the end of the month. The chance of a ‘Beast from the East’ style event of exceptionally low temperatures remains around 10-15%.

SUPPLY AT LIMITS

Evidence so far in 2021 has shown Europe’s key pipeline suppliers to be reluctant to boost exports in the face of higher prices.

Russian Gazprom, the continent’s single biggest supplier, has held its total volumes to Europe steady from the end of 2020. There was speculation that flows through Ukraine and towards western Europe might pick up in January after the producer bought a large amount of pipeline capacity at the Ukrainian border.

Flows did not match capacity however, and results from the February auction showed bookings dropped back down. While this suggests no immediate flow response from Gazprom to the high prices, the Russian incumbent could in theory book additional short term capacity via its Ukrainian and Polish routes.

The Russian incumbent may be using its own stored reserves to meet its customers needs, pushing back the need to up flows until later in the year or into 2022.

Supply from Norway since December has been running at a maximum of around 330mcm/day, with a short-lived breach above this late in 2020. Flows ran at a similar top rate through the 2019 gas winter, indicating a limited appetite to run higher in the near term.

Norwegian supply in both the 2017 and 2018 winters hit maximum rates or around 350mcm/day however, suggesting there is the capacity to flow more.

STORAGE FLEXIBILITY

The market came into the new year with an above-average level of stored gas. But limited LNG and pipeline flexibility has pushed storage outflows to their highest point in almost three years and stocks are around average when compared with 2012-2020.

It will ultimately be the weather, more so than normal, that determines withdrawals for the rest of the winter and goes on to determine injections in the summer. A realisation of the cold February could make Europe an increasingly attractive market for LNG or for an uptick in Russian flows in the summer.

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