Montel Weekly Extra - Gas markets to get “messy”

Global gas markets look set to remain historically weak with oversupply forecast to linger this year and into next. Europe in particular will get “messy”, according to Trevor Sikorski of Energy Aspects. 

Host: 

•  Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects. 

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast. This is a special edition from E-World in Essen, we're bringing you the most topical energy matters in an informal setting. My name is Richard Sverrisson, and it's a great pleasure and an honor to have Trevor Sikorsky of energy aspects with me today. Welcome, Trevor. Thank you very much, Richard. And a pleasure to be here. Yeah, perfect. We are, we are gonna talk about gas today, Trevor, it's one of your specialist subjects. Just to kick us off, maybe you could tell us a little bit about what's happened so far to markets and to prices this year.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 0:34

Yeah. 2020. Always looked like it was gonna be a very, very testing time for the, the global gas market. A lot of gas has come into the market in the last couple of years. A lot of supply demand has been very, very good in a couple of years, but certainly over 2019 and going into 2020, global demand looked very, very weak. And so what we've seen is this culmination of lots and lots of particularly new LNG coming into the market. The US shale gas revolution really being exported through that into a global market that's done its best to absorb that gas. But this year really, really struggling to do so. And then what we've seen, I think, is we have had a very, very mild winter, and that being a mild global winter. So we've seen, you know, a, a very warm period in Europe, a very warm period in Asia, and a very warm period in North. North America, so with a nowhere in the world really having very high heating demands for gas. Gas has just become very, very distressed almost, and we've seen prices just drop off and, and, and be very, very low. Low for the time of year, but low in absolute terms, amongst the lowest prices we've probably seen in the last decade.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:42

Okay. And where, where are they at the moment I thought if we start in Asia and Europe, I mean in Asia they're below almost $3. Yeah. M-M-B-T-U and approaching two 50.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 1:52

Yes. And I mean, that spread between the, I mean generally the JKM, that big Asian price marker, you know, pricing it from Japan and Korea against the, the European hubs, the TTF, that tends to always. Trade at at a premium, but that premium has come down and has come down and has come down and is at some of the narrowest levels we've seen. So that Northeast Asian market has been very, very weak and is pricing very, very close to the Europeans now. And those European prices in turn closing very, very close to the US one. So we've seen this global convergence on very low price levels, everything below $3. Getting below two 50, and you're probably looking at a summer where you're gonna see global prices, both Europe, both Asia and the us of course, you know, around $2 or lower.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:41

Do you think that's gonna be my next question. Is this sustainable? Are these prices gonna last the rest of the year?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 2:46

Well, I think it's very hard to see something that's really bullish that's really gonna change the, the supply and demand. Fundamentals for 2020. It just looks very, very oversupplied. Europe's gonna end with very high levels of gas and storage they'll end this winter with historical highs, you're looking at a very high carryout in US storage as well, and the Asians just don't have very much storage anyways. And what they have is largely full. So it is gonna be a real test to see what we can do with what is still, you know, robust supply coming into the market. Increasing numbers of LNG volumes coming into the market. Two new tra, two big new trains still to come up in the us. Two trains just turning on at the moment. In the US it just is a lot of supply continuing demand really lagging behind and those prices are gonna have to signal, you know, to supply that. It needs to start turning down.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:39

So even more is coming into the markets where is the demand then?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 3:43

Well, and, and that's the thing, and I mean. Over the last couple of years, the Chinese market has been very good at, at being the kind of backstop for global gas. You know, a lot of, a lot of gas going into that market. We saw it slow in 2019. A lot of that slow down a little bit on weather. It is two mild winters in a row, but a lot of it. In industrial production, so much demand goes into industrial production. That slowed down a lot in China because of the trade war. And now on top of it, you have coronavirus inspired problems. And you know, you are starting to see already a lot of force majeure on LNG that's supposed to go into to China.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:19

That was gonna be my next question, Trevor. I mean, um, you know, the coronavirus, we've seen numbers out there. 20 to 40% drop in demand for oil and gas in China. The outlook this year just generally dropping massively. I mean, what, what's your view on the impact of the coronavirus?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 4:35

Well, I think it's just, it's making a, a weak market even weaker because it's just saying. To an LNG market that's struggling to balance. Here's a lot of additional cargoes that we thought we had demand for and we no longer have demand. And when you look at how many could be, we've already heard of something like 10 to 12 cargoes having force majeure 10, 12. 10 or 12 is high. Uh, I mean, that was one report we saw in the ft. We've seen more confirmed amounts that we we're a bit lower than that four or five. We've heard that total. And shell, uh, pushing back a little bit. I mean, there are suppliers into that market pushing back a little bit on the Chinese.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:11

So, so they're like rejecting the,

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 5:12

kind of rejecting an fm. Yeah. Uh, so it is gonna be messy, but there is gonna be a lot of those volumes kind of floating around. And what those volumes are probably gonna do is they'll absorb any kind of. Spot, let's say demand that in Asia. Could be a little bit distressed there. And drive the JKM very low. But it will also push, I think, Qatari gas into the European market. And of course that makes the European market just you know, more supply into another market, which is struggling to absorb the amount of supply coming its way. Absolutely says all pointing downwards pretty much so everything's at the moment it does seem like it's a storm of stuff that's become very bearish. Yeah. Pushing downwards and, and does hold out a, a full summer of very, very low, quite distressed gas prices and probably that will spill a bit into the, coming, the, the, the further winter as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:58

So these, these vessels that are, you know, reacting to force majeure by the Chinese, where, where are they going? I mean, where are they heading? Well, I mean,

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 6:05

and that is the question. And so the, you know, you will kind of see the Australians either needing to actually stop producing. A lot of it's, you know, uh, Australian, LNG going into the Chinese market. Either of those are gonna have to stop producing that gas because there's just no market. Or they're just gonna have, I mean, if they're already on a boat and they're floating. They are just gonna have to look for a market and they will price downward. So there's a lot of downside coming, uh, from these force majeure. And it will be, you know, a lot earlier than we expected to see. We expected summer to be very weak, but winter is being, uh, you know, at these kind of summer-ish type low pro prices. But that does hold out for even lower prices come summertime

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:43

if this coronavirus outbreak mm-hmm. Kind of suddenly eases. And we get over the top of that and, and things improve. Do you, do you see that having a bearing on, on, on a lot of these vessels? Or, or, or,

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 6:54

yeah. I mean, I, you know, I mean, I think as soon as the Chinese economy. It gets restarted if you'd like, their use of gas Will, will, will pick up and they'll start taking, but they'll kind of referred back to, you know, the, the schedule of LNG that's already coming in. That's probably what they'll accept. So you won't see. Further rejections, but those that have been rejected will still just need to find a home and they will sit there and they will be a, you know, a bit of a wait for a couple of, it'll probably take a couple of months to work through those, but that will keep those Asian prices quite low.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:26

What's happening to these kind of, these, these cargoes, you know, in, in, in, in the European markets?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 7:30

Yeah, I mean, I think it would take some very low JKM prices to, to start sending. You know, Asian cargoes over. What we're probably gonna see though is more Qatari kind of spot. Qatari cargoes come into the European market. There's a lot of excess rega capacity in Europe, but most of that concentrated in Spain, in France and the uk So the very Western markets, we expect that. So we mean, we think the NVP, we think the the peg in France and we think the the Spanish hubs will all price. Add a discount to the ttf. So they will be low, they'll be low there, and they'll be low everywhere.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:06

So basically price is gonna be historically low all this year. I mean, that's what you're saying.

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 8:09

It is gonna be a very, very low period for global Gas. And really I think it is the cumulative impact in some ways of us. You know, very, very cheap US gas being exported around the world.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:21

But how, how are the pipeline operators reacting to this? I mean, in recent years, both Norway and Russia have exported record volumes to Europe. How are they reacting to this?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 8:31

Well, I think this is interesting. I mean, 2019 we, you know, we saw a period where we saw Norway turned down a little bit. Mm. Um, by a little bit. I mean, I. Turned out probably about three or four BCM more than we, you know, more than maintenance would've suggested. Right? We saw the Algerian gas being rejected. That tends to be oil index. So out of the money about 12 BCM coming out of last summer, there is some questions on whether there's much more flexibility on those long-term contracts to even take those. Tho those takes less Russia. Interesting though Russia really kind of defended market share last year. Sold very heavily on their short term platform. The electronic sales platform, probably something like 13 or 14 BCM with gas just in the short term market. Something they've never done before. So they were really there, really kind of, uh, engineering at let's say, you know, an early price where with the say so certainly indicated that they wanted to defend market share against LNG whether, how much they can do that. This year will be sorely tested.'cause those prices will have to go to a. To a point where it gets some form of turn down and that turn down will be both l and g we think being locked in, probably US production, but also other places will see some pressure to turn down, but also we'll need pipes to probably turn down in the European market. And that will be focused probably on those Russian flows.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:46

Right?'cause we also saw in January, record sales on the on gas proms yeah. Electronic sales platform. I mean, I can't, I haven't got the, the number off hand now, but you know, it was, yeah. Yeah. It was very high. I mean, what, what's behind that? What's the, well, I think, can you explain the thinking, uh, you know, what's your interpretation of this kind of strategy from gas pump?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 10:04

Sure. I mean, our general feeling, I think on that is, is, is what we saw is very, very sharp turndowns on nominations, right? So a lot of people have a lot of gas and storage, you know, probably want to use some of that gas and storage rather than calling on their long term contracts. Gas pump has used the ESP to counter counter, uh, turndowns in nominations. But the interesting thing about January is we went through 2019 without really seeing, you know, any material turndown in Russian flows January itself. So about a five BCM reduction in in Russian flows into the European market. And that was countered by that. Over two B, you know, that includes that two BCM of ESP sales. So selling very heavily. But we saw flows go very low. And probably the interpretation of that is one European participants with storage trying to get rid of some very high historic levels of storage, but also gas pro itself, meeting some of its contract nominations from storage rather than flowing. And so that's been an interesting turnout and a very different approach from gas from in January than we saw in all of 2019.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:07

And there's more supply coming as well.'cause when Nordstrom two comes online, the pipe, I mean that, that will flood the market yet again. I mean, uh,

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 11:14

there's a bit of additional gas. I mean, some of that is gonna be stuff that they at the moment send through the Ukraine. So some of it will be diversions. Um, part of that's because. Of a difference between where gas from has new gas, which needs to flow, and all of its old maturing fields, which is the stuff which tends to go through the Ukraine. So there's a natural reason for that happening. But I mean, they have kind of indicated that they, that maybe 25 BCM of gas that's gonna go through Nord Stream two will come from flows through the Ukraine. So there is a big chunk of that gonna go through. Having said that, there's still about 15 BCM we think of brand new gas that they'll want to monetize through. From Bob and Covo, so there is some new gas that can go as well into that market. So, and how?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:57

Quite controversial, is that the sanctions on US firms? Sorry. On on, on firms involved in the North Stream two pipeline from the us. How do you see this playing out?

Trevor Sikorski, Head of Natural Gas, Oil and Carbon Research, Energy Aspects: 12:06

Yeah. It's been successful in postponing the completion of the pipe. We expected the pipe to be completed in January of this year that, you know, that didn't happen because the pipe layers had to stop'cause they didn't want to be sanctioned by the US and that's caused them some problems. And now they're kind of talking about, well, maybe. A pipe, the pipe will be delayed for the whole year, and it may be early 2021 before they'll get the pipe laying vessels in place that are Russian and can do that. Uh, and, and the above water tie-ins being completed. So there, there's, there's not that much of the pipeline to actually complete. But getting that last little bit of it, the last 150 kilometers of it built seems to be very, very it seems like it will be a problem with those sanctions in place once the pipes. Up and running. There's not that much you can do about it.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:50

Exactly. Trevor, fantastic. Thank you for a, for a great overview of, of the gas market. It's a very bearish picture. I look forward to inviting you again on the, on the Mont podcast. My pleasure, Richard. Thank you. Thank you. That's all from this special gas edition of the Monte Weekly podcast. Thank you again to Trevor and remember to keep up to date with all our stories on Monte News. Follow us on Twitter and LinkedIn, and subscribe on Apple Podcast and Spotify. Thank you. Goodbye.