EU storage

Price action in energy markets over the past month has been interesting. European natural gas has seen increased volatility, suggesting that the market is still nervous about supply risks, whilst the oil market is stuck in a range despite deeper Saudi supply cuts.   Natural gas disruptions leave the market nervous The European gas market has witnessed plenty of volatility over the last month. TTF rallied from less than €23/MWh in early June to a peak of almost €50/MWh in mid-June, only to fall back to the €30-35/MWh range. The catalyst for this move has been disruptions to Norwegian gas flows due to outages, which led to a significant short-covering rally in the market. Firstly, this shows that market participants are still nervous about potential supply disruptions in the market, and secondly, there was a large segment of the market which was caught short and needed to cover. The fall in Norwegian pipeline flows since mid-May has been significant because of outages. In April, flows out of Norway averaged almost 313mcm/d (9.38 bcm over the month), whilst in June these fell to almost 232mcm/d (6.96 bcm over the month). While most of this gas infrastructure maintenance was planned, some of it has run longer than planned. However, despite the fall in supply from Norway, storage in the EU is still at very comfortable levels and continues to trend higher. EU storage finished June being 77% full, well above the five-year average of 62% as well as the 58% seen at the same stage last year. The lack of demand response to the broader weakness in gas prices has meant that storage continues to fill up at a good pace. In fact, our numbers suggest that the EU only needs to see around 10% demand destruction relative to the five-year average. However, in May it appears as though the EU saw demand around 18% below average. The lack of demand response does raise an important question: how much of the demand destruction since the war is permanent? It will take a while to get a clearer answer on this. In addition, whilst the market has been well within the coal-to-gas switching range, we have not seen a strong demand response for gas from the power sector. This is very likely due to the fact that while it makes more sense to burn gas than coal, spark spreads are still in negative territory. We still expect that the EU will hit full storage before the start of the next heating season – as early as September and possibly even a bit earlier if demand continues to remain as weak as it is. This suggests that we should see renewed pressure on European natural gas prices as we move through the third quarter. Prices will need to trade lower to ensure that liquefied natural gas (LNG) cargoes are redirected elsewhere. Longer term, if we assume a normal 2023/24 winter, storage drawdowns will be stronger through the heating season relative to last year, and we should exit the 2023/24 winter with storage closer to the five-year average. These stronger draws should provide some upside to prices over the winter months. There are upside risks to our view for weaker prices in the short term. This includes prolonged Norwegian outages, lower LNG send-outs – something we have started to see more of recently – and finally, the ever-present risk of disruption to remaining Russian pipeline flows to the EU.

The Commodities Feed: Oil fundamentals remain supportive The oil market remains well supported on the back of constructive fundamentals, and Russia’s ban on diesel and gasoline exports also adds support. The calendar this week is looking fairly quiet.   Energy - Speculative appetite grows The oil market has held relatively steady in recent days with tightness in the physical market coupled with Russia’s recent export ban on diesel and gasoline offset by a fairly hawkish FOMC meeting last week. As a result, Brent continues to hold above US$93/bbl. Speculators continue to become more constructive towards the market with the speculative net long in ICE Brent growing by 17,904 lots over the last reporting week to 265,531 lots as of last Tuesday. This is the largest net long speculators have held since March, and the increase over the week was predominantly driven by short covering. Similarly, speculators increased their net long in NYMEX WTI by 15,084 lots over the reporting week to 294,396 lots - the largest position held since February last year. However, speculators cut their net long in ICE gasoil, which fell by 6,940 lots over the week to 59,359 lots as of last Tuesday. The current net long is likely somewhat larger than this, given the move seen in the gasoil market following Russia's ban on diesel and gasoline exports. As we mentioned in our note last week, while the ban only reinforces our supportive view on middle distillates, we do not believe it will remain in place for long, given the domestic storage constraints that will be soon faced by not allowing roughly 1MMbbls/d of diesel exports. The latest data from Baker Hughes shows that the US oil rig count fell by 8 over the last week to 507. This is the first weekly decline in 3 weeks and sees a resumption in the fall we have seen for much of this year. The number of active oil rigs has fallen by 114 rigs since the start of the year. The fall in rig count this year is what has given OPEC+ the confidence to cut output without having to worry too much about losing market share to non-OPEC producers. European natural gas prices managed to settle more than 9% higher over the course of last week. This is despite strike action at Australian LNG facilities coming to an end, along with Norwegian gas flows continuing to recover as capacity at the Troll field returns following maintenance. With EU storage almost 95% full and supply risks subsiding, we would expect to see some downward pressure on the front end of the curve.