Short-lived gas rally?

In the first pod after the summer break, we welcome back Wayne Bryan and discuss the outlook for gas prices amid waning demand, ample supply, healthy storage and geopolitical tensions. 

Is the current rally in European gas prices sustainable, or will market fundamentals limit the gains amid a potential second wave of Covid-19? 

Host: 

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

Guest: 

• Wayne Bryan, director EU gas research, Refinitiv. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:30

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. We are returning after a short summer break. So for all those at work, we hope you enjoyed your holiday and to those listeners on holiday. Have a very enjoyable break. Today we're talking gas and we're discussing current market dynamics. And joining me, Richard Sverrisson is a regular on the pod. I'd like to say Wayne Bryan warm welcome to you.

Wayne Bryan, director EU gas research, Refinitiv: 0:59

Hey, good afternoon. Nice to be back here. Actually, it's been a while.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:02

It's great to have you here, Wayne, as ever. So we are talking gas basically today. Now we are seeing a little bit of a rally. In current prices, what's behind this win?

Wayne Bryan, director EU gas research, Refinitiv: 1:14

I think as we just discussed when I came in here, I think what we've seen, we were in a nice position the last couple of months. Range bound prices, everything was very comfortable. Supply was there, demand wasn't too great. And then we saw the rise in Henry Hub over recent days. That's helped lift, the US molecule is important and it's proven now because that's helped lift futures across Europe and also the Asian prices ticked up a bit as well. Also, we've had a bit of concern around Vel key. VE key nominations dropped from the stable 1100 to around 700, partly offset. By flows on mal nerve have been lifted slightly and now there's the backhauls been set up and there's some reverse nominations now at Valki 'cause that's only been available since March. So that spooked the market a little bit. We've got some concerns around nuclear. We mentioned French nuclear temperatures arising. Water levels obviously in flows are gonna be impacted, which means they might have to shut off more reactors over the coming days. German gas for power burn is above the four year average and actually lignite usage. Is also below the foyer average. So we've seen what the low price environment has done in terms of spurring some additional demand, even though overall power demand is down. Gas for power demand is up. So it's been a bit of a cocktail of things. And I was saying this yesterday, let's not forget the price is still cheap. Compare it to a year ago, this is still cheap gas. And once we saw the price start to rise, we then start seeing momentum build. People don't want to get caught short, so then start buying that fed into the. Into the rally we've seen over recent days. I still think around the seven euros a megawatt hour proved to be difficult to get above. Technically if things remain the same, any new fundamental changes to the supply demand mix might see it push above, but we still see the actual further upside potential is limited. And I've even mentioned we've got quite a heavy maintenance schedule over the next four weeks or so. So yeah, a little bit of bullishness, but for me, overall, we're still in a good position. And it'd be interesting to see what happens at the end of next month with storages, et cetera.'cause we're only, what, seven weeks? Less than seven weeks away from Winter,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:16

Wayne. Excellent summary there as ever. But what I'd like to go into each of those points really or some of those maybe not everyone. But I think starting with the US Henry hub prices, what's driving those up?

Wayne Bryan, director EU gas research, Refinitiv: 3:28

I think you've seen a decline in feed gas and obviously cooling demand is ramped up with really above average temperatures. I think productivity, if you look at the rig count as well, that can give you some idea of gas and associated gas production. So yeah, I think that's just driven it up. And again, that was also very cheap and I think it's it needed to do that. And we might see now some US exports. I think I was reading something yesterday, I forget the name of the company, Ian, excuse me if I pronounce that wrong. They're talking about offering it three 50 for exports, when really when we generally look at around 6, 6 50. LNG developments, again, are gonna drive the price like it has already because we all expected this big LNG supply glut into this summer. And then the US cancellation got rid of that excess we expected. But looking at September, there's rumors around 25 to 30 cargoes have been canceled, maybe even less. Which is a decrease from what we saw in July and August.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:17

And you mentioned Valki, that's the slovakian, that's the hub, or basically the entry exit points on the Slovakian Ukrainian border, isn't it? What's happening there?

Wayne Bryan, director EU gas research, Refinitiv: 4:26

Normally, ky used to flow into Europe around 1100 a day, and it's been very stable. I write about it a lot of days. I'm on the morning report and it's, yeah, it's been stable at 1100, but what we saw from the 1st of August nominations fell to 700, like I said, slightly offset. By a slight increase in mal no flows, but the reverse flow situation now, Valki has enabled them to nominate back. So we saw quite elevated nominations on the reverse side for Valki which will probably feed into Ukrainian storage, which is now I think. Close to 22 levels now. So yeah, that's the situation there. It took the market by surprise and also there was some budin maintenance that was shifted across that sort of facilitated this. So while it was a, a sort of concern, I think it will recover over the coming months and it's just a temporary blip. And yeah, I don't see any long term issues there.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:16

Mal know, for those listeners who unaware is the, it's the Polish and g exit hub, isn't it? We're still awash with gas really in Europe, aren't we? Lou Wayne? So I'm just wondering, but at the same time, supply does seem to be tightening. Would that be a fair assumption?

Wayne Bryan, director EU gas research, Refinitiv: 5:30

A little bit, yeah. Yeah. We've seen a drop in Norwegian flows. Norwegian flows have been quite erratic when it comes to Langle lead, and we've seen definitely. Some price activated sort of flow zone. It is in line with what EOR said, I think a few weeks ago, where they said they're gonna prioritize price over volume. So that gives you a little indication into the insight from there. But like you said, supply is still reasonably ample, but we've got a lot of maintenance coming and throw in the slowdown in LN. Thrown increased demand from the power sector and it's created a little bit of tightness, but let's just not forget where the storage levels are. And there's obviously gonna be quite a few injections into storage over the coming weeks as well, which is another supporting factor.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:11

So you mentioned the maintenance on the Slovakian hub or entry exit point, I should say. We've seen some. Coming up in Norway, coming up in, in ness. Kto and troll. Yeah. What?

Wayne Bryan, director EU gas research, Refinitiv: 6:23

Don't hold your breath. Okay. For their maintenance is because it's, it is constant. They're changing them, revising them, whether it's COVID impacts or whether it's actually commercial decisions. We've, like I said, when I write my morning report recently. I'm checking gas Go page constantly, because for some there's seven or eight revisions per maintenance, so they're constantly shifting. Even in the UK we've seen a similar situation with Barrow, which keeps extending its maintenance period. So maintenance is a, has been a supportive and a weakness. It depend on when it falls, but now we've seen this whole bunch of maintenance is planned mid to the end of August, early September, both in the UK and in Norway. Again, wait till they happen. Yeah, of course. Yeah.'cause we're still not sure whether they're gonna get moved again as we've been seeing of late.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:05

Yeah, absolutely. So in some sense, those, that maintenance will prevent prices falling back to below three, won't it? We again, dependent on any other factors that caveats with caveats as always, but yeah, it should do. You can't really, prices fell to below three, I think around two euros. Two euros, 23 in, in mid-May, wasn't it? Yeah. We can't see. Do you see a return to those prices, Wayne?

Wayne Bryan, director EU gas research, Refinitiv: 7:27

I get asked this question quite a lot and again I'm not too sure at the moment. There is a lot of talk and there is a potential if supply demand fundamentals continue in this vein as we get closer to the start of the winter season and storages, which are already high, will total use around 85%. Then we could see a problem. And it depends on the dynamics. There's a lot of moving parts in this market at the moment, and it all depends on where we are in the next four to five weeks. And then I could give you a more clearer assessment. But I think if we did get back to that stage again, I think you might see. I wouldn't say collective, but you might see some producer turn downs. The likes of Russia, the likes of Norway, the likes of Algeria. You might see some production turn downs just to keep prices voided. I've seen people reporting, or sorry, seen people. Alluding to the fact we could see negative pricing, but I'm still not too sure about that. But again, I'll wait and see where we are in the next four to five weeks and that'll give a clear indication

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:19

because it seems, as we mentioned at the start, that we're in a bit of a rally. How long that will continue, obviously is you are more the expert than me, but we'll see how long that, that lasts, Wayne. But what about Russian flows? We've seen them, for example, Turkey, they're massively down as Turkey looks more to LNG. Is this a long-term trend, do you think, Wayne?

Wayne Bryan, director EU gas research, Refinitiv: 8:38

I wouldn't say it's a long-term trend, but I think if you look at the strategy over recent months in terms of the overall strategy, it's been ever shifting. Like we saw. Normally when KY goes under its maintenance like it did a few weeks ago, normally we'd see an increase maybe through other routes. This time we saw withdrawals from storages, whether it was Bergam, mine, HIDA, there's a couple of storages. They were using that to utilize also, the ESP sales have been a big increase year on year, so that it, it seems like the strategy is changing and they're using the various different points to indeed, as you said, flows drop in here, increase in there. So I wouldn't say conundrum, but it is given a fascinating insight. Their strategy, if you really take a deep dive.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:18

Interesting. Yeah. And you mentioned storage. What's the outlook here for the winter? Will they be full as we go into the winter season, do you think? Or what

Wayne Bryan, director EU gas research, Refinitiv: 9:25

to looking at where it is now and looking at what we assess storage is to be close to fullness by the, by maybe even early September. But again, it's dependent on many things. However, storage is our elevated. We were in a similar position last year. The only thing that kept us propped up last year was the Ukrainian deal concerns. Otherwise, we've been in the same situation. So I see some parallels, and I haven't even mentioned the word COVID yet, which is great. I've mentioned that a lot recently. After 10 minutes, 10, it's pretty, pretty. I'm pretty, yeah, I've not mentioned COVID. That's also a factor. It's having different factors. You look at LDZ, for example, in the uk. Another remote working. If you're staying at home working, you're using more energy occupancy rates, the houses are higher. So there's a lot of different things. And with what's going on now with these second wave concerns, I think today Germany said that anyone coming from certain parts of Belgium will have to isolate. As a UK citizen, I can't go to Spain. These sort of things as well will start to have an impact. And we see a lot of staycations across Europe this year, which again, is gonna have an impact. So COVID is there. It's still, as we know now, the second wave concerns are really rising. So that, again, we will start looking at that moving forward as well. If we start to see, I think we are moving away from more national lockdowns and more regional, like we've seen in Aberdeen. Like we've seen different parts of the world, I think in Amsterdam now they're saying that you have to wear masks out in public again, that dissuades people from going out. And so yeah, the COVID will still be there. And we'll be looking at that in our season of Outlook for the coming winter for sure.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:50

Absolutely. We'll return to that I think,'cause obviously that's a key factor which will impact demand certainly in the months and maybe even the year ahead. But if we. Return to supply. And on the LNG side, you mentioned the US producers. What about the Qataris? What's going on here? What's their strategy?

Wayne Bryan, director EU gas research, Refinitiv: 11:08

It's interesting because the Qatari came out not too long ago saying they're not affected by COVID. They're gonna continue pushing forward with their plans. However, we have noted a slight slowdown over the recent weeks in terms of send outs. But they can absorb more of this low cost environment than others. And you see they've already secured a deal. I think they're. They're actually gonna be building a hundred ships and they've secured around 67% of global shipbuilding capacity over four years. So that gives you an idea of what they think. And exports to the uk again, is a can continue. What we've seen of late is Qatari cargoes of last resort, as we call them have been coming into South Hook because obviously they have an agreement if they can't find a more profitable destination. They send it to South Hook and South Hook receipts. Were a little bit higher last month and we may get a couple of cargoes this month as I think there's two on route and we may see a couple of more. Like I mentioned earlier, there's a few that have left Safam without a firm destination, and we may see some of them coming into the uk similar with Europe for a slight slowdown in LNG Sendout. But I think we've seen a couple of new additions this morning. It's a risk on, for me for the downside if LNG surprises and like I alluded to earlier company, we're talking about US exports at three 50. So let's wait and see on that front. Absolutely. So that could cap any of the gains in the it could, but also it could also, on the flip side. Start to slow down even more. But I personally don't see that Asia's a key player in this Asian demand is key to this whole balance. If Asia can soak up some extra supply, great. If not, then how is Europe gonna absorb it? Put it into storage? Storage are already close to fullness, so like I said, there's so many moving parts at the moment. You can't really fully ascertain what's gonna happen until we start getting a little bit closer. But we've all got ideas. Speaking to people in the market. Everyone's have a kind of similar opinion. There might be a few outlays out there, but most people have a similar opinion on where we are at the moment. And back to us, LNG, I mean we've seen, you mentioned the cancellations that we saw in July, and certainly at the start of August. What's the outlook here for the coming months? You need to look at the feed, gas. Any recovery in feed gas should spill into some more increase in export. Sorry. At the moment, if you look at the rig count, it's still really low, I think in late one eighties. But you do have these DUC wells drilled, but uncompleted, there's quite a lot of them that can still produce gas as well. So I think you need to look at the USV gas flows. Into the LNG export plants to get a better idea on potential exports and the, obviously the price

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:36

if we go into demand. You mentioned Asian demand. Is that picking up at the moment?

Wayne Bryan, director EU gas research, Refinitiv: 13:41

A little bit. But again, we're seeing there's different dynamics in that market. South Korea has been taking a bit less LNG looking at India. Their demand isn't where it is and they're having some real problems with with COVID now which is not a surprise for a country that size. It's looking at South Asia and some of the excess demand from there like the Vietnamese. Thai, et cetera. They're looking now to really switch to more gas fired production. So if they, that demand starts ticking up a bit then maybe that will help with the market. But also looking at China, US China relations now geopolitically are ratcheting up and I saw that China have taken a lot less LNG than they originally said they would under the agreement that was a few months ago. So that, that's a concern. So looking at on the geopolitics. Any ramp up in rhetoric between these two countries. And I believe it's getting quite strong now. I think the US are going to Taiwan, which is again creating problems. So that's also key as well with China.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:35

And what would, what impact would that have on, on, on the gas market then? If they're takings a trade worth? They're, if they're taking less, obviously that has to go somewhere else, doesn't it? Exactly. Yeah, it has to. And where would go? Europe

Wayne Bryan, director EU gas research, Refinitiv: 14:45

could be, but can we take it. Yeah, exactly. We then we dunno where we're gonna be in the next four weeks, five weeks in terms of storage levels. But yeah. Can we absorb it?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:52

We dunno yet. Yeah, no, exactly. And that's another, aspect to this shortlived rally. It may just be that peanut pizza out, out, pizza out. Exactly. I mean that, that's something that clearly you, we need to be very. Keep a clear eye on what's happening on the us China relations. Agreed. Just not just for gas, but generally in the commodities picture. Correct. But what if we look at Europe? What's the outlook here? Is there the power market, is that absorbing some of the gas? Where's the demand for gas in Europe? As I mentioned is

Wayne Bryan, director EU gas research, Refinitiv: 15:18

yeah, German power demands above the four year average that you guys are destroy it the other day. So that's rising. Lignite hardcore usage is down because of these cheap low gas prices. However, what we might see is a switch. If we start to see a recovery in gas prices, which we are now. That might then dissuade excessive switching. So I think that to me again, is something that I look at over the coming weeks after we get through this hot spell. I think demand will start to fall, but again, prices

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:47

will play its part, and obviously one of the world cards here is what's happening in France with the nuclear availability, isn't it? What's your analysis here, Wayne? Can you Every year every year, every autum, isn't it? Even when I was

Wayne Bryan, director EU gas research, Refinitiv: 15:57

working in my previous role trading. It's always something I took a look at and I was having a look at it the other day, and now we've got the rise in temperatures, which as, affect the temperatures of the river and then the flow, which means they might have to take more reactors offline. And we all would look at where we are now. It's below the three or four year average for French nuclear forecast looks a bit better because EDF obviously revised up there, end of year output, but it remains to be seen to me. I wouldn't hedge my bets on that happening at the moment. So that is, is always a concern. Similar story in the UK nuclear output's been very low and obviously Belgium has its own problems as well. So nuclear, again, will be key if we see French nuclear output close to what EDF proposed, a few or revised a few weeks ago, revising it higher then. Perhaps it won't play a bigger part, but experience tells me that French nuclears will always cause some volatility as we move towards and once we get into the winter season. But even more so the next week or two because of this upcoming mean, London's gonna be 36 similar temperatures across Europe, and we saw what happened. Last time with the French nukes that happened. So again, something to keep an eye on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:01

Absolutely. Could be another sort of wildcard. Yes. But how about sort of wind? Is that, will that as the growth in wind across Europe, will that reduce some of the gas oil? Yeah, that's a good point.

Wayne Bryan, director EU gas research, Refinitiv: 17:11

UK especially has been quite strong recently. I think yesterday we saw, at one point, I think it was 33% of the mix was wind, about six, 17% solar and then some biomass. So it was taking us over 50%. And obviously Germany very strong with wind and a lot of countries now aiming towards this. Net zero have a lot of projects on the go. I'm not sure how COVID is gonna impact these projects in terms of personnel, et cetera. But looking forward, yes, especially for me, the solar solar's growing massively. And tomorrow I think you're gonna see a very good day for UK Solar. Cloud cover's high today, but tomorrow we're gonna have blue skies and, 35 degree temperatures. Yeah, again, this is a growing area and will help offset some of that power demand, oh, sorry, gas demand from the power sector and it will only increase over the coming years. Absolutely.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:55

So that's maybe a little bit of a bleak outlook there for the gas demand picture, isn't it? The growing renewables, but probably, I wouldn't call it bleak. Yes. But, or, not so rosy anyway. Or certainly pressurizing gas money. Correct. I think that would be a way to put it. But maybe it's good for the planet, but not so much so positive for the gas. Indeed. You mentioned geopolitics as well, Wayne, and I'm just wondering, are you closely following what's happening with Nor Stream too? And yeah,

Wayne Bryan, director EU gas research, Refinitiv: 18:18

I presented for you guys in Dusseldorf Yeah. Last year. And I mentioned Nord Stream two. And I at the times said, I'd still think it will go ahead. I still think it will, but there's a lot of pressure building from America at the moment. But I think Europe wants it, like Germany definitely wants it. So I think it will happen. But who knows now? We're saying, I think Putin said by the end of Q1 21, and please don't quote me on that. Yeah. Oh, the end of Q1 21. It should be operational, so we shall see. I think I read something yesterday or this morning. Same one. Ship builders distanced themselves from it, so they won't be doing this last part of the pipeline. I think it's 97% complete. Yeah,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:53

it's almost, there

Wayne Bryan, director EU gas research, Refinitiv: 18:54

isnt. It's almost there. You've gotta think that the amount of investment being put into this, it's gonna happen. But the US are pretty strong, but I'm no legal expert, so I dunno the full, how much they can impact it. Obviously they have because people have pulled out certain partners, but I still think it would happen. But if you ask me when. I'm, I dunno. Now, there's a lot more concerns around that, but it will still happen.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:16

And I think also a lot will hinge on what happens in the presidential election in in, in the us

Wayne Bryan, director EU gas research, Refinitiv: 19:21

of course. A lot's gonna depend on that, not just in our markets, in related markets too.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:26

Finally, Wayne, just to bring us back to the C word, the COVID word, we are seeing sort of infections rise in, in certain parts of Europe. This is obviously quite a large concern. What are your expectations for a potential second wave and how that could impact that gas market? I we're already seeing it. Yeah. And

Wayne Bryan, director EU gas research, Refinitiv: 19:43

not potential. If you look at, I was reading again, reading this morning, the news and it wasn't painting a pretty pitch. I think record rises in France. Daily averages on a weekly basis. Sorry, weekly averages are now rising. And the UK was the same last night. They were talking about the rise in the last couple of weeks. Yeah. It's a big concern. Australia now, six week lockdown. We, I don't need to mention the US 'cause we all know what's happening there. Yeah, even Vietnam, which has got real draconian measures for lockdown. I think they rec, they recorded another 50 cases yesterday, which for them is quite a big increase because. The first wave didn't really affect them. They shut the city or shut the country down quite quickly and people observed all the rules that were put in place. So when you see outbreaks in places like that, and then you've got the World Health Organization sending a team to Africa, which is recording again, record rates. For me it's a bit, I always thought this second wave would arrive as soon as you start seeing restrictions eased. There has to be some rise. And again, I think until. We see a vaccine, we're gonna be in this situation for a while I saw the American doctor. He said that we won't be, have this under control till at least the end of next year. Maybe further. Maybe it's with us forever. We still dunno so much about this. And I keep harping back to, we dunno what's happening. But again, it's true with COVID. No one knows where we're gonna be with COVID. Do we need one dose? Do we need two dose? Yeah. If so, 14 billion doses. And also you've gotta look at the. The concerns economically for countries who don't wanna force themselves back into this nationwide lockdowns that we are, we all went through over the last few months 'cause of the damage economically. But at some point you're gonna have to draw the line, and yeah, COVID is a huge, in terms of recovery as well, or it doesn't paint a pretty picture. If you look at the economics and how much we're gonna be, as taxpayers gonna be paying for this for a very long time, and the job record jobless counts are rising. I think the tourism sector, they're looking over a million job losses, if not more. Yeah it's not, I'd like to paint a good picture towards the end of this, but I'll just hope we get a vaccine as soon as possible and we can get it out there, but it's not gonna be for a while. Yeah,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:42

On, on a positive note, Wayne, it's been great to have you here in our London office face to face, although we are social distancing. Yes. Listeners be assured. And it's, we've talked certainly. Virtually, and, on the phone Yes. Zooming and everything, but it's actually, it's a great privilege to, to have you here, Wayne, especially seeing as you've taken this is actually the start of your annual leave, summer holiday. So yeah, it's

Wayne Bryan, director EU gas research, Refinitiv: 22:05

the first, you got me at a good time. It's the first day of my leave. I think after today I think I'll be switching off in terms of markets for at least a couple of weeks bar the odd weekly check, of course, to keep abreast of what's happening. So yeah, he caught me on a good day. So yeah, looking forward to. Having a bit of a relaxing break actually, and I'm intrigued to see where we are when I come back.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:21

Exactly. Yeah. We'll follow up when you come back. For sure, Wayne. But thanks so much for coming in. It's been a very interesting discussion and it's always good to hear your views on what's happening in the market. You are welcome and yeah, look forward to the next time. So listeners, that's all for this week. We are back again next week. In the meantime, catch up with all the latest news on Monte online. Follow us on LinkedIn, Twitter, and subscribe to the Monte Weekly podcast on Apple Podcasts, Spotify, or wherever you get your podcasts. Thank you and goodbye.