European prices of natural gas have been breaking record lows on spot markets, leading to the questions such as: how did it happen? Is there a floor price? What will happen?
For the purpose of this article we will focus mainly on the TTF market because it’s currently is the most liquid market in Europe and because it’s gaining traction as a reference against the indexed Brent/FX formulas in Iberia.
TTF spot prices registered a tremendous fall since September 2018, coming from prices above the 29 €/MWh to the record low of 7.31 €/MWh 12 months later. In terms of monthly averages, prices fell from the 28 €/MWh, in September of 2018, to 11€/MWh in June of 2019, being currently at 15.54 €/MWh the past month of October.
Regarding the calendar years, the prices dropped from 21.67 expected for Cal19 to the current expected price for 2020 of 16.44 €/MWh, 5 €/MWh of difference.
Figure 1 -TTF spot prices evolution. Source: MTECH
Figure 2 – TTF Calendar prices. Source: MTECH
Why did this happen?
To better understand the current market situation, we should go back in time to the Winter 2017/18 where a cocktail of bullish events forced an upward momentum in the gas market that persisted until October 2018:
- The involuntary shutdown of Forties pipeline due to infrastructure problems in the middle of December and again in February triggered an unexpected increase of imports for UK from the Continent, accelerating the withdrawal curve from the strategic gas reserves.
Figure 3 – Natural Gas Storage levels in Europe. Source: Thomson Reuters
- The rise of LNG imports for Asia, especially due to an increase in the appetite from China, led by governmental directives of coal to gas switching. The rise in the appetite for LNG in Asia made this market more attractive, making more profitable to send LNG tankers to Asia instead of Europe, ergo reducing the availability of this commodity in the first quarter of 2018 (Figure 4).
Figure 4 – LNG import levels Europe & Asia. Source: Thomson Reuters
- The “Beast from the East” cold spell that hit Northern and Central Europe between February and March of 2018 led to extremely low temperatures and snowstorms across Europe, causing a spike in the demand for heating. To aggravate the situation, the largest Norwegian gas plant, Kollsnes, had to be shut down for repairs.
Figure 5 – Spot prices in European gas Hubs. Source: MTECH
The unexpected peak in demand led spot prices to values without precedents. For example, the TTF was being traded in the intraday market at 120 €/MWh and registered its maximum price on March 2nd at 71.77 €/MWh. The severity of the situation even gave the opportunity for MIBGAS to be a net exporter for the first time in history.
- The long season of low temperatures, with the Spring of 2018 starting with temperatures below average and kept a high demand for heating gas in an already tight market. The low levels of European reserves and LNG imports delayed the start of the injection season by one month, bringing stockage levels to historical minimums (see Figure 3).
The end of the bullish trend in the natural gas markets
The fear of repeating this scenario started to vanish after September of 2018, when forecasts of milder winter started to be reported, and after the levels of the strategic reserves reached a comfortable level for the upcoming winter.
Adding to this already bearish glimpse, the confirmation of a market correction was granted by the significant fall in the Asian spot prices, due to a warmer than expected winter (green arrow in Figure 6), crashing the spot prices to levels where the LNG cargoes started to shift back to Europe increasing the import flows and catalysing the fall in the European natural gas prices.
Figure 6 – Gas prices evolution (BTC, Asia LNG, NBP, TTF, HH). Source: Thomson Reuters
The trend kept bearish throughout 2019 and the injection season reinforced it, since it started a few weeks earlier than normal (mid-February) and at 50% of storage capacity (the previous winter the storage level was below 20% – see Figure 3).
The abundance of LNG in the European market, along with the great levels of storage and the high prices of the Emission Rights Allowances, EUAs (which has been discouraging the use of coal in the energy mix), contributed to a crash in the spot market that reached prices below 10 €/MWh in few occasions since July.
As the winter approaches, some questions arise about the upcoming months in order to anticipate the next price range for TTF and other market prices.
As for now, temperatures have been mostly varying between season normal / above normal delaying the kick-off of the withdrawal season. Also, the flows of LNG to Europe remain at healthy pace despite the rebound of Asian LNG prices in July, somehow expected due to preparations for winter.
Despite the rebound in Asia, recent news about the increases of freight tariffs due to the ongoing trade war between China and U.S. diminished (for now) the threat of this market picking up to a similar level registered in the Winter 17/18.
Instead of starting using the gas storage across Europe, and albeit being already at full capacity, most of the countries kept injecting gas at cheap prices. The low level of prices even led some traders to store temporarily some volumes on tankers waiting for a possible marker rebound (normal on winter season).
Mid and Long-term positions
For a budget risk client, it is important to have a fixed price before the supply period, meaning that most of the exposure for 2020 or, at least for the winter months, should be minimum by now. Being this the case, the focus is now on the behaviour of the summer season of 2020 (April – September) and the calendar product of 2021, which in the case of TTF it is also at attractive levels compared to the prices recorded in the previous years.
Despite that and looking for the market evolution, the truth is that there is a contango situation between 2020 and 2021 that can cause some friction to lock volumes (see figure 7).
Figure 7 – TTF Calendar prices 2020 & 2021. Source: MTECH
According to all the factors expressed in this article, and considering some weather reports that point for a normal winter, some experts are daring to affirm that TTF prices could reach a price level below the 7 €/MWh next spring if the current European LNG stock levels do not fall considerably throughout the winter. According to latest reports, the gap between the Asian LNG spot market and European to be able to impact significantly the current LNG flows to Europe and deviating those to Asia would be of 5 €/MWh in the case of the reloader owns the tankers and 7 €/MWh in the case of the vessels are under lease, being the latter the majority of the cases.
Figure 8 – GAP between Asia LNG spot prices and TTF spot prices. Sources: Montel & Thomson Reuters
The current trends of markets point for a widening of the gap, approximating it to favourable ranges to perform the switch (Figure 8) of LNG destinations, however, several signals point for a slowdown of the import levels from Asia since most of the countries are almost fully prepared for the winter.
As an additional bearish point, the ongoing trade war between the US and China already triggered a global economic slowdown and the fact that there isn’t yet an agreement between the two economies will most likely affect the demand for gas (downwards) worldwide.
Despite of the stable / bearish current situation, there are some factors that could turn around the current trend and affect the future prices of natural gas.
The impasse that persists between Russia and Ukraine about the long-term natural gas transit contract is one of those, since this contract is important for both countries and for the European Union, since part of its gas imports from Russia came through Ukraine. A no deal could lead to shortages in supply, affecting the balance of all European markets. Russia is responsible for more around 40% of the gas consumed in Europe.
Groningen is also a possible upside risk for TTF, since it’ shutdown is a real possibility by mid-summer 2020.
The current situation in US shale gas has been deteriorating due to the low prices of oil and gas, which now financially affect several producers. A slowdown from the U.S. could change the current situation of oversupply.
Cheap gas prices can also unlock demand from countries like India and Pakistan (greatly relying on coal now) and create new players from Middle East.
As always, no one can rely just on data and projection models, or historical events because the physical market relies on the real demand / supply situation. What is possible to affirm, with the information available today is that, Europe has never been so well prepared for a winter as today, which could unlock interesting opportunities for short- and long-term contracts in the coming months and especially after winter.
Jorge Seabra | Energy Consultant