Italian shippers take gamble on missing gas storage requirements

07 August 2017 06:15 Source:ICIS
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Several Italian natural gas market participants opted to start August without meeting their required storage targets for July, betting on falling prompt prices in the coming weeks, market sources told ICIS.

However, the move might prove less favourable than initially assumed, as high temperatures, uncertainty about imports and storage demand might prevent an expected slump in prompt prices in the coming weeks.

The issue is likely to hit those shippers that decided to resort to the so-called “storage parking” strategy in July but preferred not to buy the August ’17 forward contract, staying exposed to prompt prices.

Parking storage volumes

A storage-parking strategy allows a market participant who misses the monthly injection target set by storage operator Stogit to avoid a €0.40/MWh fine by purchasing volumes from market participants that have an excess of gas in storage.

These volumes, which are traded off screen and typically registered anonymously through Stogit’s Storage Trading System platform, are then swapped back at the start of the new month. The double transaction commonly nets out with a financial profit for the lender in the region of €0.20/MWh.

The profitability of the swap for the borrower depends on its expectations on future delivery prices and on the costs of the daily storage injection capacity necessary to inject the extra volumes.

The overall impact on the system is null, although Stogit data shows that the general target for July was narrowly missed.

Yet, as a result of the trading strategy, companies who employed a storage-parking strategy not only have to meet the August injection target set by Stogit, but also purchase extra volumes to make up for their July shortfall.

Price uncertainties

High temperatures, some uncertainty about imports and potentially upward pressure from companies in a short storage position can all reduce the financial margin of the storage-parking strategy.

August is a month of traditionally low demand, as several industrial consumers reduce their intake while production slows during Italy’s peak holiday period.

In 2016, the average industrial consumption dropped from 34 million cubic metres (mcm)/day in July to 27mcm/day in August, while the overall demand slid from 129mcm/day to 110mcm/day.

As lower demand turns into lower prompt prices, the bearish expectations about August prices was reflected by the ICIS Heren Index for August ’17, which was €0.84/MWh lower than for July ’17 at €17.179/MWh.

However, prompt prices for August deliveries started off higher than in the last week of July and largely in line with the July average, according to ICIS price assessments – in stark contrast with what happened in 2016.

“Delivery prices will let something go in the coming weeks, but it won’t be like last year,” one trader said.

Record-high temperatures are expected to support demand until around 8 August, as gas-fired power plants ramp up production to meet high air-conditioning consumption.

Meanwhile, imports from north Europe through the Transitgas pipeline in Switzerland, which have averaged 38mcm/day over the past four weeks, are bound drop to a maximum 33mcm/day between 21-25 August due to a scheduled maintenance.

More expensive oil-linked imports from Algeria might have to come in case demand stays strong. riccardo.patrian@icis.com and alice.casagni@icis.com

By Riccardo Patrian Alice Casagni