Page 5 - FSUOGM Week 48 2022

FSUOGM COMMENTARY FSUOGM

Russian pipeline flows to the EU (bcm). Source: ENTSO-G, European Commission, ING Research

Limited LNG supply growth for supply.
The liquefied natural gas (LNG) market has
helped Europe significantly this year. LNG im- 2023 will be tight for Europe
ports into the EU over October grew by almost The pace of inventory builds during the 2023
70% y/y, with volumes exceeding 9 bcm. injection season will be much more modest
However, there are constraints to how much compared to what we have seen this year, giv-
more LNG Europe can import. There are reports en the reductions in Russian supply. The ability
that LNG carriers are queuing for spots at regas- of the EU to completely turn to other sources
ification units. This highlights the lack of regas is just not possible. Therefore Europe is likely
capacity in Europe at the moment. This queue of to go into the 2023/24 winter with tight stor-
LNG carriers could also be partly due to market age, which will leave the region vulnerable next
players wanting to take advantage of the signifi- winter.
cant contango in the front end of the TTF curve. In order to get through the 2023/24 win-
The EU has seen the start-up of a fair amount ter comfortably, we will have to see continued
of regasification capacity in the form of floating demand destruction once again. This will have
storage regasification units (FSRUs) over the to be either a result of market forces (prices
second half of this year. The Netherlands, Ger- needing to trade higher to reduce demand) or
many, Finland/Estonia have or are in the process EU-mandated demand cuts (the 15% voluntary
of starting up operations at these FSRUs with a demand cut at the moment ends in March 2023).
combined capacity in the region of 23-27 bcm. While Europe should be able to scrape through
Germany is expected to bring a further 15 bcm the 2023/24 winter if current Russian gas flows
of regas capacity online early next year. This will continue, it is much more challenging if remain-
help with some of the infrastructure constraints ing Russian gas flows come to a full stop.
Europe is facing, but the issue is also around Therefore we believe that there is an upside
global LNG supply and the limited capacity, to current 2023 forward values, particularly
which is expected to start next year. those towards the end of 2023, although much
Global LNG export capacity was set to grow will depend on how much storage the EU draws
by around 19 bcm in 2023, driven by the US, down this winter, which obviously will depend
Russia and Mauritania. However, following Rus- on heating demand through the peak of winter.
sia’s invasion of Ukraine and the sanctions which
have followed, it is likely that the start-up of EU intervention will not solve the underly-
Russian capacity will be delayed. Russian capac- ing issues
ity makes up for 46% of the total new capacity EU member countries have been working on
expected next year. Therefore, we could see just policies to try to soften the hit from higher nat-
10.5 bcm of new supply capacity. ural gas prices. These include joint gas purchas-
The other issue for the EU is competition for es, temporarily capping the TTF natural gas
LNG. This year, weak Chinese LNG demand has benchmark, and the setting up of a new LNG
been a blessing for Europe. LNG imports from benchmark, which the Commission believes
the world’s largest buyer were down 22% y/y over will be a better reflection of actual prices.
the first 10 months of the year. This would have However, how effective these measures will
been due to the higher price environment as be is still questionable. Capping the TTF bench-
well as the demand impact from Covid-related mark increases the risk that we see more of the
lockdowns throughout the year. However, if we trade moving to the over-the-counter market,
see a recovery in Chinese demand next year, which will be excluded from the cap. This in turn
Europe will have to compete more aggressively would diminish liquidity on European natural

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