No room for complacency

European wholesale gas prices are falling, stocks are close to full capacity and LNG is still flowing to the region, though as winter looms market participants cannot afford to relax, yet. Listen to a discussion on the factors that will influence supply and demand in the coming months. What is the risk that Russian LNG will completely stop flowing to Europe? And can we expect renewed industrial action at LNG facilities in Australia?
 
 Host: Snjólfur Richard Sverrisson, Editor-in-Chief, Montel
 Guest: Andrés Cala, LNG Correspondent, Montel

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy matters in an informal setting. In today's pod, we turn again to the gas market. Wholesale prices are falling after a very choppy summer in autumn, but there's little room for complacency for the winter. Demand will pick up. Gas storage will need topping up, and we'll need. To keep attracting LNG helping me, Richard Sverrisson to discuss the outlook for the winter in terms of gas supply, demand, and wholesale prices is my very knowledgeable colleague and Andrés Cala. A warm welcome to you, Andres.

Andrés Cala, LNG Correspondent, Montel: 0:43

Thank you very much. Always a pleasure to talk some gas.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:46

Good stuff. Let's start and starting us off as the topic of the Australian strike. Andres, I'm hearing the Australian strike is back on. What, what's happening?

Andrés Cala, LNG Correspondent, Montel: 0:56

Only a week ago the unions were saying that Chevron had a delivered a contract that. Had not, that was not including all the terms that had been agreed upon in the broker deal with the regulator, with the work regulator in Australia. And they had warned, they had specifically said, unless Chevron gives us by echo, it turns back the contract with the proper terms and we're gonna go back on strike. And today late on Thursday this happened.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 1:22

Wow. And what's been the reaction so far?

Andrés Cala, LNG Correspondent, Montel: 1:25

The market reaction has been muted so far. And partly that, that could be explained. Analyst told us that, because the, for a number of reasons, one, that beforehand in the first part of the strike, there was no impact to supply. Thus the market is relaxed that in, at this stage, it's gonna have little impact. Two we're well supplied in Europe. We have floating storage all over the place. So even if there were any immediate. Impact it, it would it would not necessarily affect European balance. And it goes also back to the timing. The announcement today was that they would, deliver officially notify Chevron and the regulator, the workplace regulator about the strike on Monday. And after that we have seven working days, which gives us more or less a if everything goes according to plan. The strike wouldn't start until the 19th October 19th. So it gives us quite a bit of time.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:20

So there's still a little bit time for horse trading and for reaching a deal. So it's not, they haven't announced when they will actually commence industrial action, have they?

Andrés Cala, LNG Correspondent, Montel: 2:28

No. Until Monday we won't know when exactly. And how the, that stripe would look, because every time they. They give notice on in industrial action, they also give the terms of that, of the, of whatever that industrial action may be. So we don't know if it's gonna be a few hours or complete stoppage back to a complete stoppage. We still don't know that. But on Monday we should be able to find that out.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:53

Okay, so the details have yet to be released, and I think we can say safely say, can't we, to the listeners that they need to be following this very closely on Monte News. Now, the other thing, the Australian strike was the big story of the summer, wasn't it? Could you summarize it in a nutshell for us, Andres, who, what was happening and why did it have such a big effect?

Andrés Cala, LNG Correspondent, Montel: 3:14

What happened, was that one platform of unions it actually involves two unions. They they wanted they, they demanded that their contracts be updated to the terms to similar terms that other offshore workers have in Australia. And what and they went first against Woodside in Australia's biggest LNG plant. They did come to an agreement in that case. The, what analysts would tell us or told us at that moment is that Woodside is a local and they know how to play the game. And they they came to an agreement quite quickly without any industrial action. But then when it came to Chevron. That's when we actually had the only in destruction. It started about if I don't, if I remember correctly, on September 7th. And it was a better but it was a soft strike. It was just only a few hours a day. And then it lasted for a week. And the strike action the industrial action. Intensified. They moved into a few hours in, in fact 10 hours a day, 11 hours a day. But there was no impact on, on, on output, partly because Chevron brought in workers from well all over the place. As far as we know. They even brought workers in from the United States to work in the Australia, although that. That's not completely confirmed. And it but it did again, it cost no, no impact. There was no, no effect on European supply or even on, on Asian supply. And it was easily managed. However, as. We said earlier the con chevron now apparently Renegade I renegade on the terms, and now they're, yeah, as one analyst told us it's back to square one.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:50

The market, perhaps it could be said overreacted in the time when the news broke in over the summer. The question remains, we'll wait until next week until we see what the what, how this develops further. We're maybe not likely to see price moves of a sim in a similar way, would that be a fair assumption here, Andres?

Andrés Cala, LNG Correspondent, Montel: 5:12

I think so, especially, but especially because we've had the experience to over summer. About what these scripted strikes actually mean. And there's a lot of posturing both from, obviously from the companies, but also from workers. And they almost take a scripted approach to this. Take for example, the fact that they announced a strike but only for only after seven working days. That's that, if nothing else is. Just a pressure point. And it's a message to the other side saying, let's come let's reach a deal, otherwise we're going on strike.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:43

Absolutely. That that's very interesting that, you mentioned the Japan Korea market, the Jkm versus what we say, the title transfer facility price, the TTF price in Europe, and how they reacted in very different directions. Do you think the European price moves were an overreaction, Andres?

Andrés Cala, LNG Correspondent, Montel: 6:00

What is happening, especially this year, is that JAM Asian, LNG prices are tracking TTF. It used to be the other way around, of course, when we were a sync, when Europe was a sync, when LNG just ended up here if it didn't find a home anywhere else in Europe. And, but now it's the other way around. So Asia has, throughout the process, throughout the strike process maintained and sustained in arbitrage. So the arbitrage and for that matter still favoring Asia actually now even more so than during the strikes. And it's but it was precisely because of yeah. European or TTF do, I mean it's growing volatility, obviously.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:38

And do you think, you mentioned the supply to Europe we've seen kind of numbers, the imports of gas into the EU fall off a bit in, in recent weeks. Do you expect this to continue?

Andrés Cala, LNG Correspondent, Montel: 6:51

Word on the market and of course, no. Who could ultimately confirm it? That won't. But we,

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:56

in terms of what are you hearing out there? What are you what are your the analysts, the experts that you speak to on a daily basis? They must have some views on this.

Andrés Cala, LNG Correspondent, Montel: 7:05

We can only it's as easy as looking at the facts. For some reason Algerian supply to Italy is also down. Norwegian supply could also be a lot higher. We know that. But yet it's still still being contained. So what is happening? A lot of the analysts are what they're telling us, what they're in. Traders, participants are directly telling us that the, their, the regions and Algerians and producers in general they're optimizing their supply for what to what end. To support prices and we have, what's also happening is it's very much related to the contango we have now. Contango, of course, is when for when prompt prices. Are lower than forward prices. And it was narrowing for a bit, but now it's back to widening. And what does that, that the price signals that gives to Norway or Algeria is keep it for now, sell it later. Yeah, this is, although there's no confirmation of this is what participants believe it's happening. You mentioned the contango prices. We are, we've fallen back to around 45 or below 45 euros a megawatt hour. Both for, these are for the forward contracts anyway. These are, they're much lower than what we've seen, of course, but they are historically. In a historic perspective, they're high, at least, aren't they?

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 8:18

What are you hearing? What is this a kind of, could they drop even lower ahead of Minter? Of course, we're gonna maybe discuss the other drivers out there, but what do you think is, are the main things that people should look out for going forward?

Andrés Cala, LNG Correspondent, Montel: 8:32

There are always risks, but obviously it's gonna be Norway. That's the number one thing. LNG imports, for example, this month, this week, they're gonna hit their highest since middle of May earlier from earlier this year. Why? Because of the cont. We have a whole bunch of floating storage just waiting to get the extra buck from from Europe. And that's just pushing up LNG imports. So that's one to watch. But as I said, Norway is of course the key one to watch. Will they increase supply in the for the rest of the month or will they play out the contango as many others are doing? Of course. And there's also the very prompt prices versus the front month contract. As you mentioned, we're around 40, 45 but the day ahead we're around 30. That's a huge price difference that obviously players are keen to get some profit from.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 9:24

Yeah. And the weather is gonna be crucial here and we can't. Neither you nor I Andres are meteorologists or weather experts. All I know is that a seasonal forecast. I is very difficult to predict. Anything past 10 days is very uncertain. But of course Europe was saved. As the saying goes, we were saved, as we've said many times on this podcast before, was saved by a very mild. Winter last year. Now what are you hearing? We're in, nearing mid-October, temperatures are still very mild. What are you hearing from any sort of meteorologists or weather forecasters that you speak to?

Andrés Cala, LNG Correspondent, Montel: 10:00

In terms of meteorology, we have we have one key factor. I think there's one key factor to watch in terms of gas markets, of course. And that's El Nino. Because El Nino. Will will make the winter in Asia a lot milder, which means that we will have more LNG available. The key to the markets, of course, is what hap what happens when winter comes e regardless if we have a beast of the east or not we, it's gonna get colder and demand is gonna go up no matter we know that much. And so the question is, will we get to the point where Asia and Europe can. Peat for that fuel for the last molecule. And that's where when you see the real effects, the real consequences of everything we're talking about. So weather wise, there's a nino to consider that's gonna be mild. But how Europe will cope with I if if there is a cold season in both basins, both the Pacific and the Atlantic. That's the main question. We're still long, we're still long. Technically, theoretically we're long on gas with Norway can export more. Algeria can export more. We're getting very healthy supplies from Ayaan. We still have the question mark. Big question mark of Russia. Of course at all times. But all LNG supply is also very good. And Asia is not I is a. Apparently taken in mostly contracted bonds, leaving all most of the spot for Europe. So if you put it all together it's a pretty comfortable situation. Can we relax? No, of course not. We can't relax because there might be a disruption again. And there all, eventually there will be a disruption or Russia might choose to cut LNG supplies or they might choose to sanction nafta. Guys in Ukraine as they have. Threatened to do. And all that would have consequences on the balance. Everything is, we're long theoretically to to point that out again. But yeah, we certainly can't relax. Not at any moment.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:50

No, absolutely. This is what I warned about in the or mentioned in the intro that I think. That we still can't be complacent. I think that's one thing what the last two or three years have talked, taught us that complacency is not a a factor that we, or an element that we should be bringing into discussion here. But if I can I mean it's also, you mentioned Russia here and this, and I think it's still quite fascinating and I think that's often quite forgotten that, in, in terms of a lot of the bans on commodities coming from Russia. Russia is still an important supplier of LNG and even it's making money through piping gas through the Ukraine, isn't it? It's that's often not talked about.

Andrés Cala, LNG Correspondent, Montel: 12:26

And the question we don't know and nobody knows and precise. Only the president of Russia knows Vladimir Putin, of course, is what they choose to do in amid a war. At the end of the day, one of the options participants have. Talk to me about is what if they choose to sanction the LNG coming into Europe? There's the, most of our gas Russian gas coming into Europe is LNG. It's term contracts to Total from France to Naji from Spain. There are a lot of it is contracted, or most of it is contracted volume. So what if Russia wanted to hurt. Europe again, as it has in the past, as it has tried in any case. Yeah, that would be one way to go. And they certainly have enough customers in Asia.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:10

And they have form in terms of the way the gas was was cut off from August, 2021 until, until early or the Q1 of 2022. So they, it's not. Inconceivable that could happen in terms of LNG flows, I think that's quite an interesting that they suddenly just stop the flows or don't honor those contracts, those non-term contracts that you enter. That's a very interesting point. But you also mentioned Asian supply. And in terms of, so the ancient demand in terms of La Nina and if there's a mild weather in Northeast Asia, the demand, this LNG competition between Northeast Asia and Europe will not be that fierce.

Andrés Cala, LNG Correspondent, Montel: 13:52

Obviously El Nino will be one of those effects, but we have it also, we're, Asia is gonna be long as well as at least that's what we expect. And of course, weather contingent. But because of nuclear generation in Japan it's about 40% higher. Year on year winter. On winter it's about 40% higher, and that's equivalent to, yeah, around 15 cargoes that are gonna be freed up. And 50 cargoes means everything to Europe. That's, and that's just Japan. South Korea is in a very similar situation. They're nuclear gener, nuclear generation. Is also contributing to diminish the LNG imports. China is obviously economic economically, even though their imports are increasing year on year, it's nowhere close to what we expected and most of it, there are term contracts as well. And emerging Asia. Asian countries, they're very price sensitive and prices at, even at before, at the beginning of winter.'cause of course this is the beginning of the gas year as well. This, these prices are too high for Pakistan, for Bangladesh even for Thailand. So we're seeing less demand. Coming from Asia, and that's even without considering the fact the risk of a mild wind winter in, in, in Asia or the the expectations of a mild winter in Asia. Europe will be getting it. Its pick at least for now. And its, and we have the capacity, the extra capacity, which is also a huge. Difference from last year when we didn't have the capacity to bring in as much as we needed. So Europe will be able to import to balance its gas system. Even if we have a very cold winter. But again there's no room for complacency because what happens if we if any of the other risk materialize, whether it's Russia, whether it's to a very strong winter on both basins at the same time what maybe Norway ends up or Algeria and have a big disruption. There are what? If anything, what we have learned in the last three years is that expect the unexpected.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 15:55

No very, absolutely. I think a very good point. I think. There are other aspects, maybe a bit closer to home that could are also very important here. And there's, I'm thinking of the French nuclear fleet. We've seen often in past years, they've struggled to, to supply the European wholesale market with electricity in terms of what they have, what they've done before. And they, there are some issues, there's issues of corrosion and the fleet is aging, is that also when you speak to people, do they, is this kind of an also a concern that people are talking about?

Andrés Cala, LNG Correspondent, Montel: 16:27

Huge France and its nuclear generation is one of the main drivers almost as much as weather, isn't it? I think people or participants are more relaxed. At least what we're getting from French nuclear generation forecast is that yeah, it will remain an exporter throughout the winter. Borrowing any, of course, any surprise. But so they they're pretty comfortable. Participants are pretty comfortable, and it's more manageable certainly. But yeah, all the we, that, that's just one of the things. Other big question for me and for participant naturally is whether our L-D-Z-L-D-Z, in other words our household consumption, how that will react, we know in industrial demand is being subdued just because of prices, because of everything that's going on in the, on, in the global economy. But what about how citizens will behave if there's a cold winter that the, a very cold winter. We don't know. And prices are down, but that's not good. If we're just gonna end up reigniting a lot of the demand that we've managed to contain so far, or even without a cold winter, what we've already seen, traces of this the speed at which, heat pumps are being installed, has tapered off. It's coming down now, and it's, it might just be a coincidence, but it could also be a sign that not just citizens, but even governments are, yeah they're relaxing a little too much in their objectives because efficiency is gonna be a, a very important aspect for any, anything of the gas markets.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:56

We did, we talked. A little bit about this in the previous week's episode. And I think in terms of rollback of green policies and installing heat pumps or replacing gas boilers with heat pumps was one of the areas where several European countries are are. We're looking at the costs or looking at the populous backlash and they're deciding against that for whatever reason. But certainly that would be a factor. And like you said, domestic prices are very high still, even though they are falling. And I think that needs to be, and we are still in a cost of living crisis. Inflationary pressures huge. Food prices, energy prices. We're still not completely, we, I'd say we're very far from being out the woods. If it a key fundamental factor here as well. Andres is the is the storage and stocks levels in Europe. And I think we are now quite healthy, aren't you? That's at least a ray of light here.

Andrés Cala, LNG Correspondent, Montel: 18:49

Sure. That's until we get a a big winter storm we know also that storages are depleted very fast in ca when it's cold, obviously. There is a caveat to that. And that's LNG? Why? Because the economics and impart it, it's due to the contango, the economics make it a lot more affordable to increase LNG sendout than to withdraw from storage. So what's gonna what the market expects will happen in this winter is that we're gonna get as much as l as much LNG as we can. To preserve our storage. And we could have, depending on what happens, of course we could have a very comfortable start to next spring as we did this year, depending on the levels. But I think storage is our, yeah the main concern, and I'll cite you one of the predictions from ISIS in this case, if we have a strong winter in both basins. Yeah. We're 95% now. But we're gonna drop to 12%. And that's below the five year average. So no, there's still that risk for sure. There. And that's of course that's a perfect storm scenario. But the thing is that we could have, at some point, we will have a perfect storm. That's, it's a question of when Not anything else.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:01

Yeah. And being prepared for it. When you have other factors like. It was happening with maintenance at the, on the Norwegian Continental shelf. We haven't seen that level of outages or unplanned outages for quite some time. Have they? Have they surprised you?

Andrés Cala, LNG Correspondent, Montel: 20:15

No not in the sense that we postponed them, didn't we? Because we were in the middle of a war and we needed all that gas at that point. But this is gonna come back and bite us. And this is what the Yeah. Norwegian supply is not gonna be able to sustain the levels that had in the last couple years. Eventually it will. It will have to come down just over depletion. And although obviously there are discoveries and everything, but. F force maintenance is a big issue. And now I'll cite you another example. And that's again, going back to Russia, it might not be voluntary, but Russian, LNG exports could could seriously come down because they don't, because of sanctions. They don't ha they don't have the manpower, the ma the knowledge or the parts, especially to replace a lot of the components in machines that were built by Western by, by, by western players. So what could, and what we do know so far is that they've managed to sustain it cutting back on a lot of the a lot of the infrastructural, improvements they had to do. So they've managed to hold the beats down, so to speak. But this is eventually gonna bite us. Eventually, Jamal exports with, in at least two of its strains, they're expected to come down because the maintenance they haven't had the maintenance that they required in this case because of sanctions.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 21:29

Yeah, so that's interesting. So LLNG flows from Russia could either Russia could decide to just stop them or they will be stopped because they involuntary, if you like, because they can't do the maintenance that's required something will just give and they will stop. But that's a very interesting, yeah, Andres, thank you very much for being a guest on the Montel Weekly podcast. There's lots to keep in mind, and I know that you'll be covering all of these factors and all these issues and all the outlook and the forecast for the coming winter on Montel News.

Andrés Cala, LNG Correspondent, Montel: 22:00

For sure, and always a pleasure.