Snjolfur: 0:00

hello listeners and welcome to the Monta weekly podcast. Bring you energy matters in an informal setting. In today's pod we turn to the gas market. Wholesale prices have been extremely volatile over the past few weeks over fears that industrial action at Australian LNG facilities would curb gas supply to Europe. With market participants and liquidity returning after many took a summer break, were the price spikes earlier this month overdone? And what other factors will be important in the coming weeks? I'm Richard Sverresen and helping me to discuss these issues is Ole Walby, analyst at SEB. Um, The main focus recently has been on this, um, strike in Australia. Um, what do you make of, of, of, of this issue and the impact it could have?

Ole: 0:49

Oh, that's of course an excellent question and I think on top of everyone's mind these days is of course the potential full scale disruption of the Australian LNG liquefaction plants. So just taking back and see what's, what this is all about is basically encompasses both the woodside plants and the chevron plants. That'll be northwest shelf. Pluto for Woodside and then for Chevron it will be Gorgon and Wheatstone and as you heard it's been thrown around there for many weeks now but combined these facilities account for Something like 53% of Australia's LNG exports. And that means, of course, around somewhere between 10 12% of the global LNG exports. If I look at my numbers in terms of the year to date LNG trade, we see that so far this year Australia actually ranks as the second largest LNG exporter. And that goes for 705 cargoes., followed by, , the United States with, uh, nine, six hundred and ninety two cargos. So of course it is massive, uh, it's a massive exporting, uh, region, uh, and of course it's, uh, it's, uh, really nervous right now in terms of how this, um, will play out in terms of the potential strike.

Snjolfur: 2:11

Australia is very far away and you made it very clear. It's a massive exporter, but how, how will it impact European? Why, why is the European market been so jittery, uh, because of this strike?

Ole: 2:21

Of course, it has all about to do with the, uh, the Australian, uh, potential exports to, um, anymore, they have to go out in the global market and source their gas from somewhere else. And that means sourcing their gas most likely, uh, from the U. S., which means that, um, the, and this U. S. volumes are ten, uh, used to go to the European market and now they will be sourced to the Asian market. So you will have some sort of a shuffling around of LNG volumes,, meaning that the available spot cargos for the European market, which is still in sort of a, a tight situation, uh, would, uh, now go somewhere else. Hence, we have to have higher prices in Europe to get the, uh, the, uh, the amount of energy we, uh, we should have in terms of our demand.

Snjolfur: 3:09

Absolutely. So we're at the end of August now, um, And prices have eased. Do you think that there's a less of a concern now, uh, with more liquidity in the market, as I mentioned in the intro? I mean, prices really spiked earlier this month, but now, you know, have fallen. What, what, what's going on?

Ole: 3:28

So I, I think in, in the front end, we see quite substantial softening because of these Super comfortable eventual levels in Europe, right now, we're at somewhere between 92 to 93% filled, uh, in terms of capacity. At the end of August, and, and, um, I think that sort of puts a lid on the front end prices. However, we still see a substantial contango structure in the market, meaning that, um, forward prices are significantly higher. And this dynamics we have seen actually, um, since November 2022, we have seen a decoupling of Uh, spot prices with longer data prices, and that has, gradually been growing towards where we are now. Uh, meaning that it had made a lot of sense putting natural gas into storage, if you have available storage, and sell it for a route on the curve for a hefty premium. However, it gets to a point where inventories are so full that, uh, we're now seeing that we're, we're likely, or we recently actually managed to fill inventories two months ahead of schedule. European Commission tend to have a target of 90% filled by 1st of November. And now we reached that, uh, already, uh, at the end of August. So, so I think it's fair to say that inventories is, of course, putting some sort of lid on the front end prices. But I think also it's fair to mention or, uh, interesting to have in mind that inventories, uh, they cover around, when they're completely filled, they cover around 1, 100 terawatt hours,, in Europe. And this, if you look at the total demand in Europe over a full year, that's around 5, 200. Hence, inventories only covered around 20% of the demand. So we're still really, really eager to get constant flow, either from the Norwegian continental shelf, North Africa, or LNG from global energy volumes, as well as as much as possible from Russia. I think people tend to forget, the market maybe tend to forget that inventories is just a small part of the, the puzzle. And it's really important to have constant flow all the time, all around the year, because that counts for the rest of , those 80% of the demand.

Snjolfur: 5:48

So you don't think the market overreacted to these, uh, concerns about the Austr and the impact of the, uh, strike in Australia?

Ole: 5:55

yeah, I think we saw maybe an overreaction I think it's more fair to say that, uh, you know, it, it shows how tight the European or the global energy balance is, right? We are so very vulnerable to this supply disruptions, uh, either if it's from Australia or it's in terms of maintenance from the Norwegian continental shelf, or it's further reduced volumes from Russia. We, we see it right away and it affects the prices quite, um, uh, substantially. Um, so just looking at the price development from, from the, uh, the action, uh, from, from early August, we saw that the. The TTF spot, for example, surged around 50 percent, uh, the same did the front month contract around 50 percent, and we actually saw peaks at 44 euros and 48 euros for spot and front month, respectively, during August. And this is primarily due to the, uh, strike in, uh, in, uh, uh, in Australia. But at the same time, we also saw that the, the futures contract for winter 23 24, and then I'm talking about Q1 24, they, they also were climbing around 20% or something, actually hitting 60 euros per megawatt hours. And what we have seen so far since these peaks in mid August, we've seen that spot prices, front month prices has come down substantially. But the, uh, but the longer data prices either is if, if it's winter or, or if it's full year 2024, they remain more sticky. And I wanna take out of this is that, The longer term view here is that it's sort of like a nervous market. I think everyone understands that, uh, there's the global balance dictates sort of like a higher for longer case, uh, in terms of, uh, global natural gas.

Snjolfur: 7:53

You've highlighted very clearly all of the, uh, the vulnerability of the market that still, you know, any, any signs of supply disruptions and prices will spike., but what's your outlook for the winter? I mean, if we get very cold forecasts, how high could prices go? You mentioned 60 euros. Could they go much higher than that? If we, if we get, if the outlook is for a, for a cold snap, you know, in say, in January or February,

Ole: 8:18

It's also of course a great question and something we're trying to understand all the time. And what we're seeing is that, in terms of the winter. As I also mentioned just recently that everyone is talking about the inventories and how that will develop going forward. Um, we are also tracking inventories quite, uh, quite firmly because we know it's a really good benchmark on, uh, the forward prices and spot prices. What, what we're seeing now is that with the given or the, the current supply and demand balance in Europe, uh, you know, we have demand, industrial demand somewhere down 15% compared to normal. And we have a quite healthy LNG supply into the continent. Um, even though it's down lately with this high, lower spot prices. Uh, we've seen that with this supply and demand balance, we see a convergence towards normal from inventories. And what I'm meaning with that is that if we extrapolate this, uh, balance going forward, we see that like from, from now until end of year. We are basically converging, uh, in European inventories with somewhere between 1 TWh per day convergence. And why is this significant? This is significant because when we get to year end, late December, we will likely be only 30 TWh above normal in inventories. And that's nothing, that's pretty much spot on with the historical averages. And what we get out of that is that meaning that in front end prices, of course, very weak, but looking ahead, I think we could get a Nasdaq price going into the winter. Um, but this is of course already priced in, uh, at the spot price and the forward contracts. And I think it's worth mentioning that, um, Forward prices tend to price 20% likelihood of a, like a really cold winter, 20% the likelihood of a really mild winter, and then the rest 60% is more or less normal weather conditions. So if we look at the forward prices now, it sort of makes sense with having, um, 35 euros in the front and then winter prices at 55 plus, uh, mid winters. Um, But it seems doable at the moment and I, I must say that I, I'm, I'm, I'm impressed about the adaptation the European market had, had gone through, uh, during the last year., I don't think everyone, uh, thought it would be this good so, uh, so soon, but the only reason we got this lucky Is that demand has been reduced as a function of price and that's uh, Demand is a function of price both in asia and in europe. So basically the northeast asian market had said no to gas volumes at these prices. But now we see they've come down to a level where forward prices indicate that Asia will buy more, and then China will buy more, Japan will buy more, South Korea will buy more, meaning that we have to also outbid them going forward. So, I'm more afraid of the global competitiveness in, terms of bidding against Asia than in the inventory side of the story., Snjolfur: that's I'd like to return to demand a bit later in the discussion all it But you know, do you think that prices could spike above a hundred euros if we do get a cold spell them? If you get a really cool spell, you could see prices spiking above 100 for short periods. But again, the P craziness is definitely behind us. So this time it will be different, but we could of course see those kind of price spikes. And looking at the latest weather forecast, we can see now that Q4 is actually likely to be slightly colder than normal, uh, in terms of our data. Um, of course, not very uncertain so far, but, uh, it's worth having in mind that, uh, that it could get, uh, uh, colder than expected.

Snjolfur: 12:20

It's too soon to say it's the end of the energy crisis or there do you think I mean? You said the peak you said that the craziness is behind us in a way, but you know, it's we're Not, quite There yet, are we? We're not out the woods.

Ole: 12:31

Not at all. And if you look at the, the forward prices for just the winter, you know, 55, you look at the forward prices for full year 2024, uh, 40 plus plus. Thank you. You know, it's, uh, it's, it's still two times and even higher than that's above the historical average prices. So I think still the, um, we'll get back to this probably later, but the, the industrial, uh, sector in Europe, industrial in terms of demand is still reluctant to lock in, uh,, their purchase on these levels.

Snjolfur: 12:59

I'd like to turn to Norway, Ole. Um, you know, I think a lot of the focus now is on Norwegian maintenance and the lack of supply, but this is surely just just temporary. This is all planned and priced in, right?

, Ole: 13:11

there is a pretty substantial maintenance on both upstream and midstream facilities, uh, in the Norwegian continental shelf at the moment. Uh, that was scheduled from 15th of August to 7th of November, um, latest, uh, indication looks like to last around 7th of November, um, and what we're seeing is that the, If we calculate the loss of exports to the continent, uh, during, uh, from 15th, uh, August to November 7th, we see that we are losing roughly, um, 0. 2 TWH per day over the entire, uh, over the entire period, per day. So, and it, it maybe doesn't sound like a lot, but if you think about that, um, uh, that 1 TWH per day convergence I was talking about in terms of inventories, this will be directly translated during this, uh, August to November months as 1. 2 terawatt hours per day convergence, right? Meaning that we could actually end the, uh, inventory filling or inventory level below the zero line and not above the historical average. So it's, it makes a huge difference because the market is so tight as it is. And, and I think it's also worth to mention that, uh, last day I was looking at his data. and then what we're seeing is that the, uh, the pipe natural gas flow from Norway now to the continent has dropped to their lowest level in actually, uh, over a year. And now we see flows at 1. 7, uh, 1. 7 terawatt hours per day compared to normal of, uh, 3. 25 ish. Um, and I think it's, you know, it's, uh, It's, it's really interesting because why are we seeing this, uh, maintenance season now and why is it, of course, it's sort of priced in, but I think what I think is important to have in mind is that we could see even more delays, uh, than usual, and we could also see that, uh, we are having more, um, both planned and unplanned maintenance this year compared to normal, because last year we basically didn't have any maintenance at all or everything was, um, Uh, shuffled or shifted out in time because of the energy crisis, uh, during, uh, the majority of 2022. Um, and I think it's, uh, for example, we see that the Ormund Lange gas field, that startup has already faced two delays. Um, if you look at the Gasco website now, there is the new estimation for. Uh, for startup is, um, uh, late September. So, so it's, we have seen some delays on really large, uh, facilities so far. And I think we'll maybe start to see more of this going forward. And then you probably have a, a, a lose more than 0. 2 teratories per day. And that will have a huge impact on the, on the European market in my mind.

Snjolfur: 16:08

So that's still very much a bullish factor here, you'd say.

Ole: 16:12

Definitely because we don't know, um, this is so sensitive data, so we don't get any, indication from SCO before, right, before they should, uh, have the, if something is, uh, if something is, uh, delayed or, or anything like that. So, so, so I think this is really important to have in mind. I think actually the Norwegian Continental Shelf maintenance is, uh, so far. Uh, even a hotter topic than the strike in Australia, uh, in my mind.

Snjolfur: 16:40

It's certainly more real. I mean, it's certainly closer and more real in a way, because it has an immediate impact. I think perhaps we should get the system operator Gasco on this podcast sometime to talk about this, because it's very interesting and also, um, in terms of how the information is, is put out there. But I, I, I think it's also interesting to talk about the vulnerability of the infrastructure. Um, uh, because there's been a lot of talk about, you know, what would happen if suddenly there was some kind of cyber attack or or a physical attack. you know we, we, we've seen the, what happened to the North stream pipelines, but is that, is that something that also is looming larger or is that a realistic threat?

Ole: 17:24

I think everyone has sort of forgot about it. You know, it's, uh, it's definitely likely, but it's not priced, priced in at all. We don't see that in the, in the, in the prices at all going forward. And, and of course it's only speculations, but I think. Our base case has always been that during the start of the war in Ukraine, our base case has always been that we will see blow up on some pipelines, you know. We thought it will be the pipelines going through Ukraine, either on bus or, or the other direction, um, through Ukraine, but we didn't see that. So when we saw the blow up of both Nord Stream 1 and 2 in the, um, uh, in North Europe, we were very surprised, very surprised. So. And it also sets sort of the stage for a likely sabotage of, uh, of, uh, pipelines at the NCS as well. Uh, so I think it's important to, to have that, uh, sort of a, as a topic and discuss it and, uh, maybe talk to some, uh, some defense experts, but, uh, uh, but, um, definitely super interesting. Um, but not priced, priced in at all at the moment.

Snjolfur: 18:38

Yeah, but it's a that's it's a sort of looming threat as in, you know, any cyber attacks on energy and energy infrastructure across Europe Whether it's gas pipelines or electricity transmission lines or power plants, you know I think this is a constant sort of threat that looms over us But I don't want to make a big don't have a scaremonger here either all it but I think it is certainly as you mentioned It is it is a real threat but moving on to You mentioned, you know, industrial demand, uh, for gas has, has fallen substantially is that's around 20%. Um, according to some figures, will this come back?

Ole: 19:14

Well, well, since, since mid June the TTF spot has been trading more or less like at plus minus 35 euros and that's, that's the equivalent of 60 per ballast of oil equivalents and again slightly or 1. 8 times higher than historical normal So in my mind one think that Uh, such price levels should actually trigger an increased comeback of, uh, European industrial consumption. But it's really not that straightforward. Um, and we still see that there's, uh, the industrial demand in Europe is significantly lower. From my sources, I see around 15% lower than historical normals. Um, yet it's up from the... 35% below normal we saw mid summer 2022, but again, that was the peak craziness, the peak craziness, right? And, and at that period spot prices were, were hovering around 150 euros per megawatt hours. So the, the sort of like the delayed comeback, I think is a consequence of, of industrial actors being very reluctant to, to locking longer dated prices. And it goes a bit back to what we talked about, the future prices, so if you look at January, February 24 now, that's trading around 54 Euros per megawatt hour., if you look at industrial consumers of natural gas, or the large industrial consumers, , they are not, speculants in the market. They just need to, uh, have some sort of uh, outlook and, uh, and, uh, what can I say? A, a, a bright view of what they should pay for their gas going forward. And I think what they're seeing, uh, the longer, longer data price is just too high. It doesn't make sense, economical sense to buy or update their hedging profiles based on the forward prices. Uh, so, uh, they need more. They need the longer data prices to come down, more or less at the levels with the spot 35 plus maybe to be more reluctant to, uh, to or be more eager to update the hedging profiles. So as of now, it looks like they may be the largest European consumers is in a sort of a wait and sea mode. Uh, basically just questioning the longer data process and. optimally wishing to lock in their future hedges more in line with the spot. But of course, that's just your wishful thinking in my mind. And then, and then you see that some actors actually shifting their industry. Uh, some part of the industry somewhere else. Some, some actors continue to run on half machine and some actors are using alternative fuels, uh, uh, to, to make sure that, uh, they get out their output they need to deliver. But again, this is not, um, speculator, speculators in the market, but they just need some, uh, some, uh, long term view, uh, , , to be active. And I think right now that, that those longer term price is just too high.

Snjolfur: 22:18

I think price obviously is utmost importance. And you say, these are not the, these kinds of companies, they don't, they don't actively speculate in the market. They want the long term, uh, low price situation, but, um, , Is there also a case for saying that some of these companies and Um, and their industrial processes have made, you know, some efficiency gains, so that's also reduced some of their demand that they've, that the whole, uh, production processes or what have you some, have, have actually found ways to cut their energy use?

Ole: 22:48

Definitely. I think, you know, efficiency gains is the lowest hanging fruit. And that's what we saw last year as well, during, during the entire year of 2022. We saw this is where the company started and also talking with all our clients, uh, in terms of large, uh, industrial consumers, we saw that this is where they started, you know, every possible thing that could be more efficient, they shift right away or optimize right away in the beginning of the, the, uh, European chaos. So, so yes, we have seen that and that, that goes for in terms of. Gains in terms of percent, I think it's fair to say that, that maybe you will have, um, in the longterm, you lost somewhere, but somewhere between, uh, four to 7% of the, uh, gas consumption. It, it's more than I actually expected, but it's, uh, so it's a fair size, but it's also, uh, worth mentioning that. You know, we in Europe has been really, really, um, what can I say, lucky with, uh, low natural gas prices, low energy prices for a really long time. So we had been a bit spoiled in terms of history. So now we saw that, uh, a sort of like a clean up process was maybe, um, uh, about time anyway. So, but we have seen it in the industry, yes.

Snjolfur: 24:06

fascinating. I mean, we could, we could talk for hours all day, but I sort of like to bring the discussion to a close and just finally look at Northeast Asia. Um, so I think, uh, you know, what, what's your view on the outlook of demand and, and, and sort of storage in Asia? Um, for example, you know, China's recovery is slower than expected, um, Japan is much more nuclear online now. What's the view here going into winter? Is it still going to attract a lot, or as much LNG, um, as it has done in the past?

Ole: 24:40

Yeah, no, no, as long as the price is right, I think they will come back, you know, so it all it all boils down to the global balance again. Um, and as we saw last year, you know, uh, the, the, the price was a function of, or the really high price. Went down because demand disappeared as a function of high prices, right? So we could see something similar now entering into the winter, but so far we've seen a quite substantial uptick in, in energy, LNG purchases in China. Not as much as we maybe thought, and still lower than it's, what it should be in terms of history. And also lower what it, what it should be in terms of all their newly started or newly started import infrastructure. But just China as an example, I think China will require more of everything, you know, they will building out more nukes, they're building out even more coal plants at the moment, they're building out more efficient gas plants, they're building out a massive amount of renewables and, and, and so they need more of everything. And I think also, it's a pretty cool fact, but that China alone has the ability to, to cover the global consumption of, of coal for around 300 years. But this is, this is very low calorific coal, so it's, it's shitty coal, you know, it pollutes a lot. So they don't want to use that in their coal fired power plants next to the big cities around the ports. So what they are doing is that they are shifting that further inland, where they can pollute and still consume a lot of coal. But they are importing more LNG because of their commitment to the environment and also commitment to tackle smog problematic. Um, so... What we're seeing is that as long as the price is right, we know that there will be a lot of purchasing power from, from these regions. Um, and of course, Japan, Japan LNG is also an interesting story in terms of, we talked about the short term drivers. We had, of course, the NCS, we had the Australian strike, and we also have a rock bottom inventories of Japan LNG. It's actually now, I think it's, um, it's like 67% broader five year average. 15% less than what we saw last time, period last year. It's fair to say that the Japan LNG entries is not that huge, but it makes, uh, quite a substantial difference anyway. Because it means that they will likely continue to ramp up their purchases, uh, for the next couple of weeks, to ens to ensure, uh, uh, substantial supplies ahead of the winter. So I I think if we cannot, we have to continue to look towards North Asia, with these three important giants in the In the front, um, Japan, South Korea and China, historically, they imported around 55% of all global LNG volumes. I think it's fair to say that they will continue to be really large players, but now they are pretty much more, um, sensitive to price. And so when prices are really high, I know China will just burn more coal, and that will be, of course, sad to say, um, affect the environment more going forward.

Snjolfur: 28:04

Ole, thank you very much for highlighting all these factors that we should be very clear about, sir, and be looking closely at in the coming weeks and months. So thank you for being a guest on the Montel Weekly Podcast, Ole.