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Europe should Prepares for Natural Gas Price Hike

Norway sent a record high volume of gas to Europe this summer.

 

Europe’s natural gas and electricity markets are heading into the winter heating season with prices at record highs amid various supply outages in already tight markets and uncertainty over how much flexibility in gas and power generation there will be.

Forward prices for natural gas are factoring in a winter risk premium in the currently tight market, highlighting the concern that another supply outage could strain the market further and send prices even higher, according to an S&P Global Platts analysts.

Yet, the key factor determining Europe’s gas and power demand this winter will be something that no market can control—weather. Forecasts suggest that the start to the winter in Europe would be mild.

Last winter’s start was also mild, before the Beast from the East swept through Europe at the end of the season, causing one of the coldest winters this decade, squeezing natural gas supplies across Western Europe, and sending prices soaring.

The cold spell in Europe at the end of February and early March led to record withdrawals in the first quarter of 2018, and storage levels dropped to 18 percent of capacity—well below the five-year range, the European Commission (EC) said in its Q1 Quarterly Report  on European gas markets.

In the summer, natural gas prices in the UK surged to the highest for a summer season, with Europe’s natural gas market the most bullish in years, as higher-than-expected summer demand and a tighter market drove natural gas price futures to levels last seen during this past winter’s supply crunch. After touching their highest levels for a summer season, natural gas futures prices in Northwest Europe have continued to rise in anticipation of tightening supply as winter is approaching.

With winter just around the corner, gas storage levels in Western Europe are being replenished and have caught up with the average levels for this time of the year. But earlier this month, unplanned outages in Norway reduced gas outflows to other countries, which further boosted natural gas prices in Europe.

Norway sent a record high volume of gas to Europe this summer, Gassco, the company running the Norwegian gas infrastructure, said last week, noting that “More gas is usually exported in the winter months, when demand for space heating increases, but this summer’s sales have almost matched a normal winter level.”

Although it’s early to say how full-year gas sales would trend, Gassco expects “another good performance which will be roughly on a par with the 2017 record,” CEO Frode Leversund said.

Later this year, Gassco will boost the capacity of gas deliveries to Europe with the start of the Polarled gas pipeline from the Aasta Hansteen field in the Norwegian Sea.

This increase from Norway, together with more sales from Russia’s Gazprom to Europe, will be the key factors that could provide more gas and possibly, flexibility to gas supplies, if there aren’t any major outages in Norway or one like the Forties in the UK last year.

Gazprom has recently launched an Electronic Sales Platform (ESP) for physical natural gas sales to European consumers, in addition to supplies under existing contracts. Daily auctions have already started.

The third factor that could shape the winter supply and prices in Europe is how much liquefied natural gas (LNG) Europe would import. This would mostly depend on prices and the spread between the price of LNG in Asia and the gas prices at the Dutch TTF gas hub. LNG imports indeed can provide much welcome flexibility to European gas supplies, but Europe is facing the stiff competition from Asia for LNG imports, with prices in Asia higher and attracting LNG sellers to the Asian market.

Still, according to estimates by S&P Global Platts, in October and November this year, as well as in March 2019, U.S. LNG would get higher netbacks in Europe than in Asia, which could lift European LNG imports in those three months.

During December, January, and February, however, Europe is unlikely to be a competitive LNG destination, considering expectations that Chinese imports will continue to surge this winter as they did last winter.  

Prices on both Europe’s gas market and Asia’s LNG will likely stay high for the whole of the winter through March and even April 2019, as both markets look tight, according to Maarten Wetselaar, Integrated Gas and New Energies Director at Shell.

“The winter looks bullish for gas,” Wetselaar told  S&P Global Platts last week.

“Gas prices in Europe are relatively high, with storage levels not quite recovered from the tough winter, so with a tight LNG market in Asia, Europe might well see high prices as well,” Shell’s manager said.

 

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