ICIS ANALYST VIEW: Expect a turbulent European gas winter

Author: Tom Marzec-manser

2021/09/24

LONDON (ICIS)--As 1 October and the winter gas season approaches, uncertainty reigns over the availability of European natural gas in the next six months.

Typically, the start of winter is accompanied by increased flows to Europe that complement the start of storage withdrawals.

But this winter is different, as the wider general public has also come to know.

Net gas storage fullness across Europe remains 15 percentage points below normal, pulled lower by empty facilities connected to Russia’s Gazprom.

The lower availability of gas in stock could mean storage withdrawals by others are delayed until later in the winter, putting yet more strain on supply in the opening months of the season.

Imports from key producers are expected to be different, adding yet more complexity to trading the benchmark TTF.

RUSSIA DROP, NORWAY RISE

Crucially, results from October-delivery capacity auctions show that northwest Europe could see Russian gas supply drop from around 300 million cubic metres (mcm)/day in September, to just 250mcm/day in October.

This 17% fall – which led the TTF front-month to an all-time high on 20 September – follows stuttering Russian flows since late July which have been the subject of much debate.

Additional pipe gas supply from Norway’s Equinor – made available through the raising of production caps – could mean the Norwegian Troll and Oseberg fields supply more gas.

But how much extra this pair of fields can immediately supply remains unclear.

If delivered over a full gas year the extra permitted volume amounts to little more than 5mcm/day.

Any clarity as to whether the production profile could be front-loaded to just the winter would certainly provide some relief to TTF prices.

ALGERIAN TROUBLES

Questions also remain over gas supply to southern Europe.

Algerian pipeline exports to Italy are expected to rebound following upstream issues encountered by Sonatrach.

Italy’s Eni states that daily throughput has been restricted by as much as 25%, suggesting that, once the issues are resolved, flows could increase by 11mcm/day to 42mcm/day.

But this is a far cry from the 68mcm/day that was being delivered into Sicily at the start of the year.

Into November, the concern surrounding the availability of Algerian gas moves from Italy to Spain.

A new transit deal for Algerian gas through Morocco remains elusive, which in the worst-case scenario would initially lead to the loss of a further 20mcm/day from 1 November.

With the Medgaz pipeline not likely to be able to run at the expanded 29mcm/day rate until the end of that month, Iberia potentially faces a tight November.

And even once the upgrade is complete net flows could ultimately be down 13mcm/day relative to current rates given the squeeze on capacity.

In the instance of Algerian flows, however, ICIS Analytics does expect a timely resolution to the issue of Moroccan transit.

LNG SAILS AWAY

As it currently stands the opportunities for Europe to capture additional LNG supply look increasingly slim.

New winter-delivery buy tenders from China’s Sinopec and Turkey’s BOTAS, coupled with a top-priced spot deal this week into Bangladesh, suggest global demand remains robust despite some indication of consumption being turned down as margins are squeezed.

Perhaps the only reassurance the TTF can find from the global LNG market is that some major European utilities continue to sell spot cargoes into Asia.

This suggests that as far as those utilities’ portfolios are concerned, they consider themselves covered.

If they turn short in Europe, then cargoes could head back even if the price spread to Asia is not attractive.

The ICIS LNG Global Supply and Demand Forecast shows LNG fourth-quarter imports into northwest Europe, when factoring in the global imbalance, are at just 6.7m tonnes, down 25% on the fourth-quarter three-year average.

A NOVEMBER WAVE?

While November has the potential to be challenging for Spanish supply, it could well be the turning point for Russian flows.

Gazprom’s domestic gas storage fullness needs to reach a targeted 72.6 billion cubic metres by the start of November, at which point – assuming this deadline is met – Russia ought to have more gas available to export.

ICIS Analytics believes Gazprom’s aggressive storage injection campaign within its home market has been absorbing an additional 90mcm/day.

This means that, notwithstanding any unexpected hikes in Russian demand, a similar amount of gas could be sold into the TTF.

Turkish off-take of Russian gas also remains a pivotal consideration.

The latest LNG tender by BOTAS, coupled with its pipe spot purchases from Azerbaijan, could suggest that Russian make-up volumes supplied via TurkSteam and BlueStream will not continue at their high pace even with a price incentive in place.

Should less Russian gas flow to Turkey, more could flow to northwest Europe. And no doubt into Gazprom’s own stores if not immediately consumed.

Such a development could send the TTF into a downward spiral.

TURBULENCE, NERVOUSNESS

With so many hurdles on the supply side, and even before concerns of weather-driven demand come into play, the opening months of the winter are set to be the most challenging since Europe’s gas markets were liberalised.

TTF price volatility will continue.

The ICIS LNG Global Supply and Demand Forecast expects the LNG market to be short through to at least summer 2023, meaning prices are likely to remain well above pre-Covid times, even when the winter is over.

While not alone in causing supply-side uncertainty, Gazprom’s sizable volume flexibility clearly means its actions will have the most impact in the coming months for those in Europe and beyond.

For this reason, November-delivery pipe capacity auctions, scheduled for 18 October, have the potential to lead to a trading-day like no other.