Page 7 - FSUOGM Week 12

FSUOGM COMMENTARY FSUOGM
European gas feels COVID-19 effect
EUROPE
WHAT:
Gas prices in Europe have fallen to seasonal lows.
WHY:
Besides COVID-19, the market is also under pressure from high levels of storage and warm weather.
WHAT NEXT:
Suppliers will start to scale back shipments, and Gazprom, as the largest supplier, may face forces majeures.
THE impact of the coronavirus (COVID-19) pandemic has been more profound on oil rather than gas demand.
Efforts to contain and slow the spread of the virus have caused fuel consumption to plunge across Europe, as aeroplanes are grounded and motorists cut back on unnecessary travel. However, the closure of shops, factories and businesses has also sapped demand for gas and gas-derived heating.
Gas prices in Europe have fallen to new his- torical seasonal lows, with average rates at the Dutch TTF hub in March declining to $100 per 1,000 cubic metres and plunging to $90.3 on March 19.
Beyond the pandemic’s impact, Europe’s gas market is also under pressure from warm weather, record levels of storage and higher LNG imports. The continent’s top supplier Gazprom sells most of its gas under long-term contracts linked to oil prices with a six-to-nine month delay. Weak oil prices last year are therefore now beginning to feed into these contracts, driving down the Russian gas exporter’s prices.
The collapse in benchmarks over the past month will also be factored into the contracts later in the year.
Forecasts
Oslo-based Rystad Energy has slashed its fore- cast for growth in gas consumption in Europe to just 0.7% for this year in response to the cri- sis. The consultancy now anticipates demand to total 556bn cubic metres in 2020, down from a forecast of 560 bcm it made before coronavirus containment measures came into force. Europe consumed 554 bcm of gas last year.
Rystad based its predictions on most of the continent’s countries going into lockdown for 30 days during March and April.
“As people stay home and businesses close their doors, demand will decrease for power generation and for burning in the industrial, commercial and residential sectors,” Rystad said.
The lockdown will cause a loss of 4.1 bcm in expected gas demand, reducing the continent’s total usage to 89.2 bcm. Germany, Italy, the UK, France, the Netherlands and Spain will take the biggest hits to consumption levels, according to Rystad. Germany, the biggest gas consumer in Europe, will use 15.4 bcm of gas in March and April, compared with the 16.1 bcm Rystad had previously forecast.
“During the last few days the likelihood of seeing further lockdowns across Europe has increased, making this scenario more likely,” Rystad’s head of gas and power markets, Carlos Torres Diaz, said in a statement. Also, Italy is about to end its second week of lockdown and it doesn’t seem to be coming to an end yet.”
Power consumption will be down 7% during
the lockdown, Rystad said, resulting in a similar drop in gas demand in this sector in the period. Industrial users will cut consumption by 5%, commercial users by 20% and residential users by 2%.
The consultancy is yet to account for any potential demand losses as a result of lockdowns in May onwards, though there is a significant downside risk.
“With TTF front-month prices currently trading below $3 per mmBtu, we see limited downside risk, given that at a lower price, export- ers of US spot LNG cargoes would not be cov- ering their short-run marginal costs and would rather divert cargoes to other regions, or adjust down production,” Torres Diaz said.
However, there is a risk that prices could plunge to $2.3 per mmBtu while the market rebalances itself, according to Rystad. In this environment, odds are slimmer of there being a rebound in prices until next winter. Asian buy- ers should help soak up additional LNG supplies, as the current price remains competitive versus coal. This in turn could help prop prices up at around the $3 level.
Over the longer term, Fitch Ratings expects European prices to rebound gradually to $5.5 per 1,000 cubic feet ($5.5 per mmBtu) within three to five years.
“We assume the Dutch TTF and UK NBP gas prices in Europe will gradually recover to $5.5 per 1,000 cubic feet over three to five years, broadly corresponding to the full-cycle costs of US producers, including shipping to Europe and capex,” the ratings agency said in a note.
But gas prices will remain low in the mean- time over the next two years, according to Fitch, due to weak demand for LNG in China, high vol- umes of gas in European storage and the com- missioning of new LNG capacity, albeit at slower pace than in 2016-2019.
Suppliers’ response
Gazprom is yet to scale back shipments in response to the virus. The gas producer saw a more than 40% year-on-year collapse in its ship- ments to the continent in January because of over-storage and warm weather. But its exports have actually been stable this month, in spite of the lockdowns.
According to Russia’s Kommersant, Russian exports via Ukraine averaged 150mn cubic metres per day in March 1-19, up from 135.3 mcm per day in February. Shipments via the Nord Stream pipeline averaged 189.5 mcm per year, up 8.6% compared to December.
The company is likely to cut supplies as lockdowns intensify, however, and it could even receive forces majeures from its buyers, as could other major suppliers such as Norway’s Equinor.™
Week 12 26•March•2020 w w w . N E W S B A S E . c o m P7