The natural gas market in Europe has evolves at a frantic pace in 2022. The obvious is with the Russian invasion of Ukraine and Europe’s dependance on it. Before that was the changing Energy dynamic through Brexit and ESG policies. That led to a shift in new LNG imports from the US and Australia and Qatar. That has led to a disconnect between pipeline benchmark Title Transfer Facility (TTF) and LNG arriving by sea at the continent’s ports which EC President Ursula von der Leyen has recognized.
“Today, our gas market has changed dramatically from pipeline mainly to increasing amounts of liquefied natural gas,” she said. “But the benchmark used in the gas market – the TTF – has not adapted. This is why the Commission will work on establishing a more representative benchmark.”
The EC is looking for a new index that would cover LNG deliveries at regasification terminals and provide another reference price for “the supply and demand dynamics of international gas markets.”
The Commission said it would “deepen its discussion with member states about the best ways to reduce gas prices” in the weeks ahead following an address before the European Parliament last week by EC President Ursula von der Leyen.
An important fact is that the LNG arriving this year to fill the Russian deficit is less expensive than the gas traded on Europe’s pipeline hubs. The result has been rampant speculation and volatility. The nexus between actual prices paid and the TTF is wildly different making it not acceptable for secure hedging.
The EC has proposed revenue caps on some power producers and a windfall tax on the excess profits of oil and gas fuel companies. They are also proposing targets to cut electricity demand to help reduce consumer energy bills. However, this is not an easy path as they have seen with the market’s response to the UK’s price caps and energy bills wrecking the British pound and bond markets on Friday. What was being proposed just a week ago with regards to caps in some European countries looks dead in the water given the risk to the Euro and bond markets.
Storage inventories are at 85.6% of capacity, ahead of the 80% target the EU set for Nov. 1.
Rampant food and energy inflation has also cut into power demand across Europe.
Excess profits and revenues would be redirected to consumers, but the European Union (EU) executive branch avoided proposing price caps for imported natural gas. The reality is proposals by the EC to control soaring energy costs don’t directly affect natural gas plays in Europe and are unlikely to soften volatility as is. Hence the need to change the benchmark.
“I don’t think the measures proposed by the Commission will help reduce gas prices,” said Rystad Energy’s Carlos Torres-Diaz, head of gas and power markets. “I think the proposed solution is more reasonable than trying to cap gas prices as the latter could have resulted in a further drop in gas supplies and hence a tighter market.” Adding “will hardly alter the energy mix meaning that gas will continue to be needed in the power sector to meet demand.”
Simply caps could result in lowering EU supply as sellers would redirect volumes for better prices in other markets, and there is no shortage of demand for natural gas at his time. This would put upward pressure on prices at benchmark TTF.
Indeed, the LNG that has flooded the continent this year is less expensive than the gas traded on the continent’s pipeline hubs.
Spark Commodities’ front-month Northwest Europe (NWE) LNG basis assesses the difference between physical cargoes delivered ex-ship (DES) to import terminals and the TTF benchmark. Last week it was negative $18.79/MMBtu last week. Spark’s front-month Southwest Europe LNG basis was at negative $17.62.
Record highs for TTF of over $100 late last month saw Spark assess the NWE LNG basis differential at a record of negative $19.255 on Aug. 25.
In the past the TTF European gas pipeline price was seen as a sufficient proxy for delivered LNG into Northwest Europe, with the differential between these prices being a small spread. It would often match the costs to regasify and send the gas into the grid. Clearly since the abruptness of ending Russian pipeline gas the TTF NWE and SWE matrix has changed substantially.
The wide discount stems by the record volumes of LNG arriving in Europe. The bulk of the LNG arrive from the United States. U.S. netbacks underscore the profitability of sending spot cargoes to Europe rather than Asia. Import capacity is another factor.
We are heading into the European winter and though TTF has fallen by 40% in recent weeks from highs of more than $100 to around $60 this week. Henry Hub at the same time has fallen from over $9.20 to $6.60 at the same time. There is a connection. Henry Hub being the benchmark futures contract is also the main pricing point for U.S. LNG, which has accounted for the bulk of global supply growth in recent years coming from Sabine. LA and Cheniere.
Be interesting what the EC signs off on for a new benchmark for not just TTF but US HH natural gas futures. Speculators and hedgers alike await.
Source: Reuters, TC
From The TradersCommunity Research Desk