The bearish cherry

Amid a backdrop of tumbling European wholesale gas prices, this week’s episode takes a look at the multiple bearish factors overwhelming the market. Find out what the “bearish” cherry is and listen to a discussion on where the price floor could be, and how and when prices could recover. 

For expert views and analysis of the impact of the coronavirus on energy market, please visit our daily extra at covid19.montelnews.com. 

Host: 

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

Guest: 

• Wayne Bryan, Director, European Gas Research, Refinitiv. 

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:05

Hello listeners and welcome to the Montel Weekly Podcast. Bring the Energy Matters in an informal setting. Listeners, if you are wondering how long the EU Gas Supply Glu will last, or how. Low gas prices could go this year, or how much COVID-19 has impacted gas demand, then you've come to the right place. Joining me, Richard Sverrisson day is Wayne Bryan of Refinitiv. A warm welcome to you, Wayne, and welcome back to the pod.

Wayne Bryan, Director, European Gas Research, Refinitiv: 0:34

Good morning, Richard, and you. Thanks for having me back.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:36

No worries. How, how are you, how are you bearing up in these, uh, these very challenging COVID-19 times.

Wayne Bryan, Director, European Gas Research, Refinitiv: 0:41

Not too bad. I mean, everyone's in the same situation. So really it's a case of getting on with it. Got my work set up here in my conservatory, so, you know, can't really complain. I can see the skies, but yeah it's a challenge for everyone. But I think this is now my 10th day, I think 11th day working from home, so yeah, getting used to it. Not for too long, even though we know it's probably a couple of months. Yeah. So yeah, I'm Okay.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:06

Good to hear. Wayne, I thought we could start today Wayne by talking about supply and then we move on to demand issues. What's happening here? I mean, I could see that, you know, Norway and Russia are still pumping, fully pumping the gas into Europe. Is that the case?

Wayne Bryan, Director, European Gas Research, Refinitiv: 1:22

Yeah. At the moment we haven't seen a massive change in flows, but. So typically you normally see change in the profile, which might give an indication of future flows, but I think in the current environment, I think things have changed. We're really not sure in terms of the demand destruction, how bad it's gonna get. Looking at market this morning, clearly they see it going further down as well. We're already seeing et TF six and a half euros, megawatt hour from month. So I think at some point, and I think that's the whole point, that everyone's looking to see who, who is actually gonna blink or who's gonna turn down first. I mean, it seems to be on LNG Russia or Norway. Who's gonna blink out for three? We don't see a massive turn down in LNG well us, LNG anyway. Um, in terms of Russia and Norway, I mean, it, again, it's hard to call. You'd probably, if you were to, you know. Stick a punt on it, you'd probably go for Russia, toughen it out in a lower price environment for a bit longer. And again, that might not just be that might be for other reasons, political reasons, also market share purposes. So there, there is quite a lot of uncertainty. I mean, the only way we're gonna find out is looking at the flows over the next few weeks and seeing where we go, and obviously seeing how low the price goes and how. So there, there's so much uncertainty. I mean, I've been trying to give price forecast, et cetera, in the current environment. It's, yeah, it's, I'm say impossible, but it's fraught with many, many challenges and, and things are changing on a daily, or sometimes some cases hourly basis. In terms of what's happening across the globe. We've got 3 billion people under lockdown, under social, 3 billion people. And also I. 92% of global GDP has been affected by social distancing. Um, and it's, I mean, it's already been going for a few weeks and we're talking America now in lockdown till the end of April. The UK talks of autumn, I mean, all non-essential production has ground to a halt, not just in Europe and across the world, apart from non, apart from essential businesses, obviously. So the airlines are. Much of that. At the moment we're all talking about entering this peak and Trump's talking about two weeks of hell and Yeah. And looking at Moscow is now in lockdown, Mexico. They're finding new cases. Africa. I mean this thing, the speed and aggressiveness of, of this has caught everyone, um, including me. I didn't think things could ever be this bad, but here we are

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:03

four or five weeks ago, the situation we're now is, would be completely unimaginable.

Wayne Bryan, Director, European Gas Research, Refinitiv: 4:07

Yeah. And what's also interesting yesterday. If we take it back a few weeks before this even started, we already going into. Wondering about oversupply, wondering about, you know, how too much LNG storage is still full. Again, you know, demand hasn't been great. The winter wasn't cold in Atlantic or Pacific Basin, and so we're already having concerns about an oversupplied market even before COVID-19. And, and now that demand destructions on a. On unimaginable scale, so, so yeah, we already were bearish. And now, and now, now we've gone through that. Some, the previous numbers, we thought we'd see this early in the, in the season.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:45

So gone from bearish to uber bearish maybe, but

Wayne Bryan, Director, European Gas Research, Refinitiv: 4:48

something like that. Yeah. But at the end of the day, we all know that the market isn't just gonna start giving gas away for free. No. Unlike the oil market, I think, where some barrels are changing hands for less than 10 bucks at the moment. Yeah. Certain blends and further along the curve we're seeing, you know, 8, 7, 8 oil or negative pricing. In some instances, we're not gonna see that in the gas market,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:07

but I mean, are, are we close to some marginal cost to production for, for some producers? I mean, Norway's come out, EOR said around two, $2 per MMB to U and that's about translates to about six, doesn't it? So I think, yeah. What happens now? I mean, they can't, they, as you say, will they start. You know, going into, you know, almost producing at a loss and flowing it at a loss.

Wayne Bryan, Director, European Gas Research, Refinitiv: 5:27

Yes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:28

You think they will?

Wayne Bryan, Director, European Gas Research, Refinitiv: 5:29

That's the case. Well that's, I dunno. I mean, we dunno, and again, like, like we said today, we've seen already that TTF front month is trading at a trades at a low of 6.6. So we're already, we're not far away. So I think watching the flows over the coming days will. An indication, or not even coming days, but just watching the flows over the next month will give us an indication. But I mean, see, I see L down a bit, stay till 48, but it's still quite high considering we have got a bit of cold weather, obviously, bit of frost, et cetera today. But I. Short term, we might not see a real big turn down in the next couple of days, but I think they're gonna start to evaluate what's gonna happen moving forward. Because this isn't going anywhere. And we can see that with these lockdowns and what it's doing to businesses. Absolutely. In general, a lot of businesses won't even recover from this. Even when we do get outta it, there's gonna be a concern that some businesses won't be there despite. The stimulus. We're seeing record levels of stimulus from central banks around the world who seem determined to stop their economies grind into a halt. But the longer this goes on, the more money they're gonna have to pump.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:34

And there isn't a, there isn't a magic money forest even maybe.

Wayne Bryan, Director, European Gas Research, Refinitiv: 6:38

No, definitely not. And I think that's the big concern about when it does pick back Africa. Where's the, where's the demand coming from? I think consumer spendings gonna have a massive drop. I think today we've got the PMI numbers, which are gonna give us a real, a real indication of what's been going on in Italy. For example, I think they come out at nine o'clock today, so they'll be keenly watched.

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

So I think just for those listeners unaware when we're recording on Wednesday, the 1st of April. And, and so Wayne's already referring to a massive drop in, in, in gas prices as we're seeing in Dutch TTF market. It's the 1st of April. The start of Q2. This is normally the season where, for example, Norway will have lots of maintenance work on its offshore production. Yeah. But it's postponed that into the autumn or into Q3, Q4 potentially. What impact will that have on flows? It would just continue. The flows will just continue. Do you think?

Wayne Bryan, Director, European Gas Research, Refinitiv: 7:24

Yeah. Again, it's not something that was really needed to be honest. I think you'd be to extend maintenance. We're gonna see a lot less maintenance and some maintenance have been shifted to Q1 next year. The worst this gets as well. You've gotta imagine that the operational staff availability is gonna suffer and not only in gas markets, but if you look at the coal market as well, people get into the minds, et cetera. LNG, we had force majeure declared in India due to operational staff at the ports not being available thanks to social distancing and. So that, again, is an issue that's gonna affect maintenances. So like you said, I mean you can call it bullish risk, but they are gonna be shifted. But at the end of the day, I mean, there's no real demand to soak this up anyway. So even if the maintenances were happening, it wouldn't have made a big effect. And the fact now some of them have been canceled and postponed or shifted along, only exacerbates. The supply issue to be honest.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:26

Absolutely. So, I mean, if we then move on to the demand side, as you, you, you've already talked about quite a lot Wayne, but if we focus on Europe, I mean, are you, like for example, in the power markets we're seeing up to 20% drop in industrial power demands. Correct? Certainly in, in. Italy and Spain. What, what's happening on the gas side is are we seeing a, an equivalent kind of reduction?

Wayne Bryan, Director, European Gas Research, Refinitiv: 8:45

It's not as high, obviously. It's not as high, but it depends on what market you're looking at. But we seeing up to 10% demand destruction in gas markets. But again, once we get this new data, data's the key. And once we get some further data from Italy, we've got quite a bit of data now from Italy, which gives us some good data to actually play with and project that onto the rest of Europe. So yeah, we we're probably five to 10% depend on country and obviously the energy fuel mix of each country. But yeah, I mean. Demand is, is completely taken off, especially when you look at industrial production, car manufacture, this sort of thing. It, it's all been halted. So yeah, I think that'll get deeper though.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:22

So obviously Spain and Spain and Italy are the worst hit. Have we seen similar decreases in Northwest Europe?

Wayne Bryan, Director, European Gas Research, Refinitiv: 9:28

Yeah, the uk demand is down a few percent similar in France as well. So no country is immune to this at all. It's just demand destruct. Is what's key here. So, but this is gonna, like I mentioned, this is gonna continue. There's nothing open at the moment. I mean, in the UK there's, there's nothing open. It's a similar story across Northwest Europe. So I think that demand situation is only gonna, it can't get much worse 'cause there's not much open, not much less open, to be honest. So I think what we're seeing now, yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:01

Are there any particular sectors that are worst hit you? You've mentioned that the car manufacturers they're shutting down, but. What about, you know, the transport? Okay. Yeah, transport.

Wayne Bryan, Director, European Gas Research, Refinitiv: 10:11

If you look at the tube, I think I saw yesterday that tube journeys in the last two weeks are down 95%, which is a staggering.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:18

Yeah, that's

Wayne Bryan, Director, European Gas Research, Refinitiv: 10:18

staggering figure. Obviously the airlines are grounded. I think Ejet grounded all their flights yesterday. Yeah. Rich Airways are not flying from Gatwick. The carbon intensity from that. Big drop in carbon intensity, not just in the, in Europe, of course, but globally. Also, I mean, the travel and tourism sector has been absolutely hammered with the restriction on people movement, the closing of all big shopping malls, restaurants, all these little, small pockets of demand that when you add them up, create a bulk of our demand. They're all closed, you know? All completely closed. So I think there's no sector that's really immune, but I suppose if you look at the biggest sector affected, it's obviously gonna be manufacturing big and manufacturing and obviously, um, transport.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:03

Yeah, absolutely. Those are the, the key sectors. In addition, if, if that wasn't enough, you know, the oversupply, demand destruction, you know, force majeure, we got. The end of, of European heating season and warmer weather coming as well. So, uh, so that will also cut demand, will it not?

Wayne Bryan, Director, European Gas Research, Refinitiv: 11:19

Yeah, we're, well, we're in shoulder season, uh, now as well, so, yeah. I mean, again, that,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:24

could you explain shoulder season? For those listeners who aren't unaware of that Wynn

Wayne Bryan, Director, European Gas Research, Refinitiv: 11:28

shoulder season is what, is what we, we talk about when a drop off in demand in Asia is not, the demand hasn't really in Europe now. Cool in heating season to the cooling season. So this shoulder month, you generally see a slowdown in demand as we change profiles. And if you look at the coal market as well, in coal, this is the weakest part of the year seasonally. And now you add in the. COVID-19 destruction and it further exacerbates the downside potential in that market as well. So similar, yeah, same sort of story for the shoulder season as well. So it's all just coming at the worst time. And if you look at storages, storages are, are significantly higher than last year's level, which we all thought were too high anyway going into last summer. So similar, a lot of the factors from last summer. Still here, and then you throw on top of it the bearish cherry on top of, as we've said, is COVID-19. Demand destruction.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:23

Absolutely, Wayne. So then, I mean, you mentioned prices. This is at the start of April. I mean, we're at six and a half euros per megawatt hour on the TTF, how much further do you think these prices can fall?

Wayne Bryan, Director, European Gas Research, Refinitiv: 12:36

Well, a lot of people said the mark is. And again, we're getting, we're getting very close to that and we might even touch below. We could even see a sub six trade today. That's a bit of work for it to do. Yeah. I think once we get, if these PMI come out quite bad in a 30 minutes or so, we're gonna see these contracts on the nearer curve come under more pressure. So I think I'm not here. I can't come in and say it could be five euros. I think that the general consensus is the six euros mark. We're still not actually physically there yet. So the moment we get there, we'll see over the coming days the reaction. We'll see if we go further and then see what the effect is on flows. But something has to give, and a lot of people are talking about LNG or us LNG slowing down, but that's not really the case. 90% of contracted, 9% of volumes are contract. So. We're looking at the 10% of Uncontracted demand, so that's not that much. They can be prone to. And also as well, if you look at the, look at the difference spot spot and then looking at hedging measures, you've still got a couple of months to play with. Again, these long term contracts, they underpin 90% of of us exports. A lot of this talk about us slow down or turn down for that 10%. Yeah, for the rest of it, unless there's some sort of contracts we're not aware of, whether I don't take these volumes and I'm sure they, they have to, you might see some force majeure being declared. But as it stands, I think, I don't think there'll be a slowdown in us LNG in the short term. Maybe a couple, maybe after. Maybe it gets April and May, June, July, as we might see it happen then. But as I said, with 90% on long-term take or pay contracts, that really negates the short term falling of us LNG imports, it might be the fact that force majeure maybe from East Spain or some other countries might. Have an impact, but in the short term it won't be LNG turning down and we're still seeing Asia. In its so-called recovery mode. There's still concerns how long that will last and their output factory output's improving, et cetera. But it's not enough to take on all the excess supply that we're now seeing globally.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:51

So do you expect these cargoes to continue to come from Asia?

Wayne Bryan, Director, European Gas Research, Refinitiv: 14:55

Well, the Asian price now is. It's fallen. We see a slow down in actual export growth, but we still see, sorry, import growth into, into Europe, but we still see an additional four BCM. We forecast seven BCM initially for this summer. Additional imports into Northwest Europe. But in light of recent developments and actually the ability to soak up that excess supply, uh, means that we, we dialed that forecast down to, to four BCM for the coming summer. So we still see the LNG coming. I think we might see it slow down. Looking at the, looking at it now, we see a few deliveries still in, in, in Q2 and perhaps a Q3 slowdown. However, if we see some form of recovery of demand, then perhaps it, we could see more arrivals in Q3, but as it stands now, we look at it in that way. I'll just think about this now in terms of, we're talking about turn down. If we think about offtake of Russian volumes, we still have some oil indexation still present in several contracts. And with oil where it is now in the sort of typical three to six month lag. That might be a sort of way we might see less volumes being pushed if off-takers nominate less Russian gas. However, gas pump can still push additional gas on the E-S-P-E-S-P, which we've seen quite a lot this year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:11

What are your expectations of demand growth in Asia now? I mean, you, you said is there, are there sort of some shoots of recovery there? So we're seeing some pickup in in Asian LNG demand.

Wayne Bryan, Director, European Gas Research, Refinitiv: 16:22

Yeah, we are seeing some pickups, but again, we, we see it slowing now. Again, I think I, I forget the exact number, but Chinese demand was scheduled to rise by, by a certain percentage, and that now has been dialed down due to what's happening. Same with India. We were looking at India to, to raise LNG imports this summer, especially with the prices where they were, but they've now gone, I think you got 2 billion people in lockdown and they're declaring force mares at their port. It's just a difficult environment. It really is,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:54

as you say, it was the the bearish cherry, was it, you called it?

Wayne Bryan, Director, European Gas Research, Refinitiv: 16:57

Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:58

What would it take for prices to pick up again, Wayne?

Wayne Bryan, Director, European Gas Research, Refinitiv: 17:01

Well, I've said this other week and I think one of the questions was, was around, you know, what will happen and what, what can, and I did say, and I mean it has to at some point. We have to see a bounce back. And I think that I, I've actually put that as a, you know, it's an upside risk because it might take a bit of time. But once we do see some green shoots of recovery or we see some. Economy's restarting and then the prices will go up. But the problem is where they're going up from.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:29

Yeah. Yeah, exactly. And when they'll go up.

Wayne Bryan, Director, European Gas Research, Refinitiv: 17:32

Yeah. And when they're gonna go. And that's what I was speaking to someone last month, just in the general terms, talking about this whole global issue. And I was saying that like we're seeing these central banks throwing money at the market. It's like a sticking plaster. And the longer this goes on, the deeper this recession is gonna take a grip and the longer it's gonna take to get out of it. So if we were in this for another month or so, then I think the recovery will be quicker. We're hearing talk about social distancing measures for 12 months.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:00

Yeah. We

Wayne Bryan, Director, European Gas Research, Refinitiv: 18:01

are hearing talk of gathering, still being canceled and conferences and all these things. Now, if these are canceled longer than the initial window of three months, that. It's gonna create further problems down the road in terms of demand. So while there would be a reaction, the reaction won't be big enough. And even if we do see, it would need a dramatic supply cut perhaps as well, you know, supply just fall off a cliff, uh, in order, in order to push the prices up. But, yeah, I, I. I see a recovery of course, because things can only get better. I mean, they've, they've not got worse to the point where it's at the bottom yet, I don't think. But once it does get to that point and we see some sort of reaction, then we have to see a recovery. But I think it's a, it's a long road back at the moment, if you, and if you see the news coming out today and last night and the numbers that they're talking about, pretty horrific really. And. Bad picture for the remain scary remainder. It's very scary. Yeah, it really is. So for the remainder of this lockdown, you've got large swats of Europe completely shut down. And until we start restarting that. We can't see any real recovery in prices. And I'm seeing now carbon's actually down 4% already now. So it, the news from last night is spook markets and equities are also down at the open as well. So it's, you can see it's get, it's getting worse. We had a little bounce, but again, once you see the realization of how problematic this is gonna be, prices are gonna keep falling, really are.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:31

The news that that the cases are really of coronavirus have really spread in the US Yeah.

Wayne Bryan, Director, European Gas Research, Refinitiv: 19:35

200,000 minimum deaths. They were talking, it could have been even 2 million. Yeah. It's staggering that's the word. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:42

It's mind blowing. But on another note, what do you think what's gonna happen with the Premier League? I, Liverpool. Liverpool gonna be crowned champions.

Wayne Bryan, Director, European Gas Research, Refinitiv: 19:49

I think football. I think about football constantly. Even, even. The season has to go ahead, and that's purely on a financial basis. If they don't complete the season, I think it's 800 million pounds. The Premier League clubs have to pay back, and as you know, they don't have that money. So this season has to be completed. Who knows when? Who knows when? But tell you what, if that comes back, I'll be the happiest person. It'll also mean that. Society itself is getting back to normal the moment we see a full football stadium, but I do think that is a long way away.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:23

Well, fingers crossed, but thanks Ross. No worries, Wayne. Fingers crossed. We'll get back to normality fairly, fairly soon anyway. Yeah. But Wayne, thank you very much for being a guest on the Monte Weekly podcast. You're welcome. Always a pleasure to have you on board. Speak to you soon and have a great day. Thank you. Thank you. Remember listeners to keep up to date with all our stories on Monte News and follow us on Twitter and LinkedIn and subscribe to the podcast on Apple podcasts and Spotify. Thank you and goodbye.