Summer Markets, Producer Optimisation?

           Energy Markets

European gas markets have been set alight by a sharp turndown in Norwegian gas flows through Langeled. This has received much attention in a market that had turned up from lows earlier in the week. As we move into summer deliveries, what should we expect? Have moves over the last 6 months been reflective of the real outlook or merely a short-term stampede on winter’s oversupply?

A year is a long time in the markets. Late Q1 2018 and 2019 couldn’t have been more different in terms of demand conditions. Surprisingly, a look at prices in both gas and power (carbon adjusted) from the same period would suggest that they had much in common and differed little. The events of last summer in terms of price risk appetite is still fresh in the mind with 50-60% increases in summer pricing witnessed through Q2 and Q3. The retracement in gas pricing has been almost textbook, with a near 100% retracement seen.

Winter 2018/9 proved to be unremarkable and failed to provide a demand shock. What has happened, however, is a very real supply shock. That shock has been the volume of LNG available in the Atlantic Basin, which has broken records month-on-month. As Asian LNG prices have collapsed from the not uncommon 100%+ premiums to European hubs, the volume of Russian cargoes from Yamal and a return of Qatari deliveries pressured pipeline gas for space on the grids of Europe. Given the high volumes and weaker demand, storage levels across Europe have moved to five-year highs.

The high volume of LNG into NWE this winter needs to be seen in terms of price optimisation by the producers. Asian prices are not attracting speculative cargoes, and suppliers have been looking to optimise receipts given that the huge price advantage has disappeared. Yamal is perfectly located to serve both markets, and currently opportunity is resting in Europe. Given that later in the summer Asian demand will peak again, we should be very sceptical that deliveries will remain strong regardless of global conditions. The global move towards gas from coal will only increase LNG demand, absorbing new supply over time.  Looking to winter, the propensity for China and other Asian markets to pay massive premiums over traditional European hub prices in a period of peak demand signals that Europe should not get too comfortable with pipeline rivalling LNG volumes.

Of the large European pipeline producers, the Russians continue, at least for now, to flow gas. However, has the turndown signalled a different approach from the Norwegians?

The market bulls have been active since Wednesday, pushing gas and power markets off from lows. Given this morning’s news and the start of London’s Easter school holidays, there was always going to be potential for the short coverers to stampede into the weekend. Removing the emotion, it’s perfectly normal for Langeled flows into the UK from Norway to revert to “summer” delivery volumes in the first few days or weeks of April. The price action last Friday has caught surprise only in the heavy-handedness of the turndown. Some market commentators had suggested that shippers may look to remove the surplus. The question that is really driving last Friday’s near 10% increase in summer gas prices is whether the Norwegians really optimising volumes or just trying to jolt short-term prices up from year-long lows.

It would be foolish to view LNG cargoes this winter as anything other than producer optimisation. We should not be surprised that pipeline gas follows. In the heat of the action this morning, we should not jump to any conclusions. It’s the age-old argument over short-term flowrate and long-term volume flow. Norwegian levels could easily return to the customary 40-45mcm/d over the coming weeks. Given that the summer/winter spreads looked far too wide, this snapback could hold. However, the fact that Equinor (Statoil) has reduced gas flows into Europe in April isn’t really news at all, and the reaction to it is perhaps more a reflection of increased commercial drivers and the heightened volatility seen in all asset classes through 2018 and into 2019.

Jason Durden

A former equity derivatives trader with Citicorp and RBS, Jason has worked in energy for 14 years. As well as managing trading teams looking after gas and power energy funds and multinational European contracts, Jason has personally risk managed some of the UK’s largest flexible gas and power contracts.