European gas market

The Commodities Feed: Supply risks vs demand concerns Commodity markets largely shrugged off developments in Russia over the weekend, with the focus now back on China demand concerns and the US Federal Reserve.   Energy – Rangebound crude Energy markets largely shrugged off events over the weekend in Russia. Oil opened strongly yesterday, but gave back a lot of these gains as the day progressed. As a result, ICE Brent settled just 0.45% higher on the day. The more hawkish tone from the US Fed appears to be capping oil prices and the broader commodities complex, while there remain broader concerns over China’s economic recovery. Up until now, oil demand indicators for China have been good, with stronger crude oil imports and higher apparent domestic demand. The concern is whether this can continue as there are clearly still some weak spots within the Chinese economy – specifically with industrial production and the property sector. For the oil market, there is little on the calendar for today. ICE Brent August options expire today, which will be followed by the August futures expiring on Friday. The latest open interest data (which is up until Friday) shows that there is still open interest of more than 17k lots at the $75 strike for August call options. Meanwhile, we will also get US inventory numbers from the American Petroleum Institute (API) later in the day. The European natural gas market had a volatile trading session yesterday with TTF trading in a range of EUR5.40/MWh over the day. Obviously, there would have been concerns over the remaining Russian pipeline flows to Europe following developments in Russia over the weekend. However, fundamentals for the European gas market are still bearish in the short term. EU gas storage continues to fill up and is now more than 76% full, well above the 57% seen at the same stage last year and also higher than the five-year average of 60%. In the absence of any significant supply shocks, EU gas storage will hit the European Commission’s target of 90% full well before 1 November. This suggests that later in the summer we could see further pressure on prices and a deeper contango along the forward curve – there is already an almost €20/MWh contango between the August 2023 and December 2023 TTF contract.  

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: LNG supply risks linger Natural gas prices are likely to remain volatile in the coming days, at least until there is some clarity surrounding potential strike action at a number of Australian liquefied natural gas (LNG) facilities.   Energy – OPEC sees deficit over remainder of 2023 Oil prices came under some pressure yesterday with ICE Brent settling a little more than 1.3% lower on the day. This is despite OPEC releasing its monthly oil market report which suggests that the market will continue to tighten for the remainder of the year. OPEC made little in the way of changes to its global oil demand forecasts for the rest of this year and for 2024. However, the group did revise higher its 2023 non-OPEC supply estimates by a little more than 100Mbbls/d on the back of upward revisions to Russian supply. OPEC numbers suggest that demand for OPEC oil over the third quarter will be 29.56MMbbls/d, which is well above the 27.31MMbbls/d that OPEC produced in July. The call on OPEC output grows to 30.74MMbbls/d in the fourth quarter, whilst over 2024, the group’s numbers suggest demand of 30.08MMbbls/d for OPEC oil. Given the current production targets of OPEC+ until 2024, these numbers suggest global oil inventories will draw for the remainder of this year and over 2024. The International Energy Agency (IEA) will publish its latest monthly oil market report later today, where it will share its latest outlook for the market.   The significant cuts that we are currently seeing from OPEC+ continue to be supportive for medium sour crudes. The Brent-Dubai spread remains in negative territory and in fact has traded to a discount of more than US$1.20/bbl – lower than the levels seen during 2020, when OPEC+ made significant cuts. The weakness in Brent relative to Dubai should mean that Atlantic Basin crudes should be more appealing to Asian buyers. It is difficult to see any significant reversal in the spread before Saudi Arabia starts unwinding its additional voluntary supply cuts. Having rallied significantly earlier in the week, following supply risks around Australian LNG, the European gas market gave back some of these gains yesterday, with TTF settling more than 6.6% lower on the day. The European gas market remains in a comfortable situation with storage more than 88% full and it is clear that the region will hit its target of 90% by 1 November, well ahead of schedule. However, the market will still need to keep a close eye on how labour negotiations progress in Australia. The potential for prolonged industrial action at a number of Australian LNG facilities could put a little over 10% of global LNG supply at risk, and given Europe’s growing reliance on LNG, this would (as already seen in recent days) have an impact on European gas prices as Asian buyers compete more aggressively for alternative supply.

Supply risks plague the natural gas market The European natural gas market has behaved in a volatile manner over the summer. This was sparked by prolonged maintenance in Norway, significantly reducing gas flows into Europe. In fact, further maintenance in Norway again saw gas flows declining more recently. There's also been concern over Australian LNG supplies, with workers threatening to go on strike. Potential strike action would have put supply at three facilities at risk, which make up around 10% of global LNG supply. These LNG supply risks have eased somewhat with unions and the Woodside company coming to an agreement for workers at the North West Shelf facility. However, negotiations are still ongoing at two other facilities operated by Chevron. These have a combined capacity of 24.5mtpa, around 6% of global supply. This is clearly still a risk to the market, particularly if we see a prolonged strike that would affect all of this capacity and if it runs deep into the Northern Hemisphere winter. Australia is not typically a supplier of LNG to Europe. However, reduced LNG supply would mean that Asian buyers would look elsewhere for alternative supply, increasing competition with European buyers. This is an upside risk to European gas prices, particularly if it were to occur over the heating season. European gas inventories naturally decline over the winter, with demand basically doubling over these months. If the LNG supply, which Europe is more reliant on now, is also reduced, inventories would fall quicker through winter. That said, Europe is in a comfortable situation in the near term. Despite Norwegian disruptions, storage has filled up at a good pace and is, in fact, 92% full already. This is above the 79% seen at the same stage last year. It also means that the EU has hit the Commission’s target of having 90% storage by 1 November, more than two months before the target date. We believe that Europe will go into the 2023/24 winter with storage basically at 100%. This suggests that in the short term, we will need to see European gas prices weaken and trade at a discount to Asian LNG. This is to ensure that LNG flows are diverted from Europe. Only when Europe starts drawing down storage during the heating season will we see further upside for prices.  

The Commodities Feed: Central banks increase gold reserves The latest data from the World Gold Council shows that central banks purchased around 800 tonnes of gold over the first three quarters of 2023 as geopolitical uncertainty pushed them to diversify more towards safety assets. The trend is likely to continue in the fourth quarter amid tensions in the Middle East.   Energy – US oil inventory increased over last week The crude oil front-month contract has been trading soft at around US$85.7/bbl this morning as the risk premium continues to soften in the absence of any immediate danger to the oil supply from the Middle East. Oil supply remains healthy with a Reuters survey reporting that OPEC oil production increased by another 180Mbbls/d in October compared to September with higher production coming from Nigeria, Angola, Iraq and Iran. Having said that, the risk of an escalation in the Middle East cannot be ruled out and the market remains cautious on that front. Weekly inventory data from the API shows that the US crude oil inventories increased by 1.35MMbbls over the last week; lower than the average market expectations of around 1.6MMbbls. Cushing crude oil stocks are reported to have increased by 375Mbbls. On the products side, API reported that gasoline and distillates inventories fell by 357Mbbls and 2.48MMbbls respectively, over the week ending 27 October. The more widely followed Energy Information Administration (EIA) report will be released later today. India’s crude oil imports dropped to a YTD low of 17.4mt in September 2023 as firm prices and refinery maintenance weighed on crude oil demand. However, some reports suggest that imports may have recovered in October as refineries increased operating rates whilst some of the state refiners also increased imports to meet annual purchase obligations under the term deal. The European gas market traded softer yesterday following the expectations of the arrival of the Ciaran storm over the coming days, which could bring down electricity demand due to infrastructure damages. Meanwhile, gas storage is running nearly full in Europe (99.3% of the capacity as of 30 October) as unusually mild temperatures have reduced the overall heating consumption in the nation.