Putin intervenes

UK and continental European gas prices plunged from record highs following comments by Vladimir Putin saying Russia was prepared to increase gas supply to Europe. Listen to a discussion on current price dynamics, calls for market intervention and black box trading.

Guest: 

• Wayne Bryan, Director, European Gas Research, Refinitiv

Transcript

0:01

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Richard Sverrisson, Editor-in-Chief, Montel: 0:34

Hello listeners and welcome to the Montel Weekly Podcast bring you energy matters in an informal setting. This week we returned to the gas market UK and continental European gas prices surged to record highs in recent weeks, triggering an energy crisis across Europe. Industry ministers and consumer groups have all called for intervention in a market. Some have labeled, broken or not fit for purpose to talk us through current market dynamics. The main price drivers and the outlook for the coming weeks is our old friend Wayne Bryan of Refinitiv. Hi Wayne. Welcome back to the pod. How are you doing?

Wayne Bryan, Director, European Gas Research, Refinitiv: 1:09

Good morning, Richard. Yes, I'm very well, thank you. It's nice to be back and actually nice to be back here live.

Richard Sverrisson, Editor-in-Chief, Montel: 1:13

Absolutely. We're recording live in London.

Wayne Bryan, Director, European Gas Research, Refinitiv: 1:15

Exactly. So no, I'm very well. Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 1:16

So Wayne, talk us through. Current price dynamics. This week we're recording on Thursday, we've seen prices surge to unbelievable levels, and then come off basically on the back of some noises from Russia. What, what's happening?

Wayne Bryan, Director, European Gas Research, Refinitiv: 1:30

Yeah. It's been a, it's been a wild few weeks, let alone week, and yesterday's. Downside was shocking to say the least in terms of the speed of it. And of course we saw Putin with his nice comments about additional gas supply to Northwest Europe this winter. Once the domestic situation has been sorted out in terms of refilling their domestic storages. Now he did say that. There will be, they will exceed their quota through Ukraine, but indeed did say it is more expensive for them. I think it works out additional sort of three, 3 billion on an annualized basis, what it would cost them to pump additional gas to Ukraine. He did mention the ESP as well. So there'll be some volumes that can go through there. ESP being what? The actual index? Yeah. That ESP electronic sales platform. Yeah. They've been pushing, they've been, yeah, they've been pushing, delivery through that for a while now. I don't think we've seen anything since August this year, but he did signal that as well. And also he just had a generally, a nice tone about we're here to help Northwest Europe solve their gas shortage problems. And of course, me obviously being a trader before, I think what you've seen here is a classic case of buy the rumor. There's no concrete bookings of any additional volume. Yeah. As far as I'm concerned. Unless you've seen something I haven't. So again, it's a classic case of buy the rumor and the price did. Rise quite steeply in the previous session. And again, more comments from Gaz Prom this time from, I think the head of one of their exports. And he was talking about there's Ashbury on the trees which means it's gonna be a cold winter in Russia. So we're gonna, again, prioritize domestic over exports. And that was the day before. So you can just see what's happened in the last couple days. It's, for me it's unbelievable. To see the MVP over 400 pence of the, and then trade back where it did was quite startling. And I feel sorry for those, A lot of those traders out there, especially if you've got short positions, et cetera, because this volatility is not normal and these large one day price swings are really having a detrimental effect on that side of the market. But. Yeah. Until we see something booked, the, for me, there's nothing's changed. Yeah. But there is that rumor. And of course we all get taught by the rumor. Yeah. So the fact, so let's just see what happens over the coming weeks. The next auction should be pretty key as well. Very interesting at the effect on these markets.

Richard Sverrisson, Editor-in-Chief, Montel: 3:35

Absolutely. What, as you said, this is not nothing really new. Gasper has said this, that there will be flows this year. There will be additional capacities. Really, it's astonishing that the market has, prices have come off that dramatically. Yes. Just on the basis of some, yes. Some noises from Putin and other Russian politicians. Maybe this shows just how nervous the market is.

Wayne Bryan, Director, European Gas Research, Refinitiv: 3:58

Exactly. It highlights nervousness. It highlights, all it took was a few words, and we see prices, come off dramatically in the space of a day. And even as I'm looking this morning, we are down another, Q one's down front, months down, day ahead, they're all falling. I think we're down about eight, 9% this morning on the near curve out until Q1. Even the summer's down 7% today it just reemphasizes how short this market is, how nervous this market is, and highlights the uncertainty that we have moving forward throughout this winter. And we're only, tomorrow's means winter's been open a week. Yeah, so it's early days and we saw the effect of the colder weather forecast the other day as well on, on prices. So again, this is gonna be a continuing theme. We said that we've been saying that now for weeks and months that expect volatility to continue. And volatility, if you look at it as a measurement of close to close, has been at levels we've never seen before. And again, it just highlights market nervousness,

Richard Sverrisson, Editor-in-Chief, Montel: 4:49

but this kind of volatility prices up five, 10, 12%. Have we seen this before?

Wayne Bryan, Director, European Gas Research, Refinitiv: 4:54

No, not to this level, no. And I was looking at this for our winter outlook we did recently about average price movement, and it's up over, 20 fold in terms of looking at day to day on the MVP and the TTF. Where we used to, we used to price volatility, but we've been seeing 50 pence here, 20 euros here, movements we're really not used to whatsoever. And it's just, yeah, it is making the news. And that's the, that's one thing I always say, I've never had so many requests in, I've never seen requests from people to speak about this. Yeah, because you turn on the tv, it's on the front page. Yesterday they were on the news, they were talking again about gas prices, was the main headline. Talking about Putin, I see Putin's face all over the news today. But he was always gonna have an impact on this market. And I think we've spoke about it before, and I think even in previous times I spoke to you guys, the effect he has on just a few words like Donald Trump on the crude market in global markets in the past, this has shown the influence Putin has. But I think it was his openness and his willingness to be conciliatory and offer these additional volumes to Absolutely, to Europe. Very nice of him.

Richard Sverrisson, Editor-in-Chief, Montel: 5:51

Very kind man. Very kind man. So we're quite lucky to have you on board here, Wayne. You must be, much sought after your opinions on what's happening and your explanation. You mentioned 400 pence per the, on the MVP, the UK gas Hub. On the TTF. We've seen prices close to 200 euros a megawatt hour. What drove them that high?

Wayne Bryan, Director, European Gas Research, Refinitiv: 6:09

Again, it's just these concerns and I think they're exacerbated this week by what we saw in terms of a downside vision in temperatures, especially in Germany. And I think with that colder weather, again, we want to be injecting, but we're still gonna be withdrawing throughout this winter. And there is, if you look at some different potential scenarios, a beast from the East scenario in tandem with a lack of LNG due to steep Asian prices would result in this, I wouldn't say we're gonna run out of gas, of course, 'cause that's a bit too much scare mongering. But we're gonna drain these storages even more. And I think the concern is if we end up below last year's levels when we get to the end of the winter season. It's like we're kicking the can down the road and we're gonna face these same problems again. Maybe not as strong next summer because we won't have the extensive maintenance That knocked out a lot of UK and Norwegian production last summer, which also, was a fundamental factor into why we entered the winter with storages at such levels.

Richard Sverrisson, Editor-in-Chief, Montel: 7:04

What's happening here with gas prom in Russia is this geopolitics. Is it Gasper saying, look, if you don't approve Nord Stream two, look what happens to your prices. Look what's happened, happens to your energy. You are in a crisis and it's because you are not, you haven't approved Nord Stream. Two is that what's happening or is it, or does gas, what does Russia have? Does it have over capacity?

Wayne Bryan, Director, European Gas Research, Refinitiv: 7:23

Can it supply more, Russia is. It's impacting prices. We all knew that and we said that, in our webinar a few weeks ago about the sentiment around nor stream to additional supplies to Russia from Russia into Northwest Europe or into Europe in general, and milder weather can, is they want two of the only factors that can push this market down or make it a bit more comfortable. So in terms of Russia, number one, they're satisfying all their contractual obligations. They've delivered as they said they would to all their clients. Number two. One of the reasons, again we talk about Nor Stream too, and of course they want it up and running. They've got the transit contract with Ukraine that expires in the 2024. And obviously it seems like they won't wanna be extending that at all. And now that probably has a political aspect to it. Which I'm, I don't like to get involved in these political issues, but you can tell from the outside that, with what's happening with Ukraine and Russia, they're gonna be averse to, sending in more gas through that. By not buying post 2024, it proves that. And also as well, if you look at their own domestic problems, they've had, I think they entered their, the start of summer with their domestic storages down a good 20% against where they were the year before. So they have a priority to prioritize their domestic market. Then they have to refill their storages by November the first. And it was always been thought of that. Once that happened, we could see some additional gas coming into Northwest Europe. Also as well in terms of production. We don't get all the data, of course. I think it comes mainly monthly, but we know that Russian production has had its issues this summer with the fire at the concent plant. We've also seen them product producing close to capacity. So do they even have that additional capacity to produce more gas and send it to Europe? We did see the talk the other day talking about Novatech. Perhaps they could put an put 10 BCM into the market. Again, something that Putin had identified. I'm not too sure GS prom were too keen on it. But again, there is the potential for additional gas into Northwest Europe. As Putin said yesterday, we might push it by the ESP or we're gonna increase our flows via Ukraine. Or they can buy more on the month ahead auction. So they've got options. I don't think it's right to blame G Prompt. They advised the market what they were gonna deliver. They're delivering that all their customers. But what you will see is if you look at Northwest European storage inventories now, if you look at them, as a whole, you see there at these, multi-year lows. Now, if you separate that and take away what we know Gazprom has in its store capacity, HiDAC, Ryden, et cetera, if you look at that chart of just Gazprom controlled storages, they're significantly below where they normally are this time of year. Now, that was a case of earlier in the year, GPRO was satisfying their contractual obligations through Northwest European storage. Now, if you then take a step back. Look at the Northwest European storage inventory without the Gazprom storages or the where they hold storage. You can see we're around 2018 levels. We're not as bad as we thought. So you can point the finger at them, but not in a direct way. It's their strategy and their way forward to use their domestic storage, or sorry, to use their European storage. To satisfy. Long, long term contracts and that's what we've seen. And that kind of explains the shortfall. And I think there is some, watch what I say here, there is some sort of pressure in a sort of underhand way that is, look, you need this gas. We've seen what's happening now with inflation. Let us let us get access to nor stream two quicker than the six months.'cause we all know now it's four months from the German regulator, and then the EU have two months themselves, so it could be six months. All the paperwork was in, I think on September the ninth, i've always said, and I said this in our webinar as well in some reports, that I believe that we might see a speeding up of the certification process in order to ease the pressure on gas markets. That doesn't look quite as needed now in light of yesterday's comments, but it still could be a possibility. But then you have the unbundling rules as well. We know that AG have complained against the original decision, allowing that would allow, third party access to the pipeline. So you've still got that as well, rumbling on in the background. We didn't foresee any Nord stream two volumes potentially until Q1. We looked at a few scenarios where we factor it in Q1, but we didn't expect any flows via Nord Stream two this quarter. Okay. At all by the end of 2021. So yeah, Russia's playing, a huge part. In this, let's not, let's not shy away from the truth. They're centric to all what's going on, but when people start attributing blame to them, that's when I find it's, I think it's a bit too easy, I think to blame Russia.

Richard Sverrisson, Editor-in-Chief, Montel: 11:42

And as you said earlier, the Ashbury are on the trees in Russia, so you know, they're expecting a very cold winter Yes. As well on top of that yeah.

Wayne Bryan, Director, European Gas Research, Refinitiv: 11:49

And if you look at the forecast for Ukraine and Russia, before it looks a bit colder than normal. Yeah. That again, who can blame them for satisfying their own domestic? Market and making sure they've got security of storage for their own people. There's, I don't see anything wrong with that personally, but hopefully they get filled soon as possible. So we might see some additional gas into Northwest Europe, or as Putin said yesterday, via various means. So again, it's all to be, it's all to be seen, like we said at the top of the show. Nothing's changed. Nothing I've seen. No, agreements of additional capacity. But we do know that now there's rumors of it. The market is listened to these rumors and the effect is quite apparent on today's and the way today and today's prices

Richard Sverrisson, Editor-in-Chief, Montel: 12:25

and the way prices tumbled and how quickly and how they've accelerated down. Has that taken you by surprise, Wayne, or is that something you expected?

Wayne Bryan, Director, European Gas Research, Refinitiv: 12:33

I wouldn't say the actual, The num yesterday was quite a extraordinary day. If you look at the chart, yesterday being Wednesday. Yeah, sorry. Yesterday is Wednesday when we saw this, Dutch. Future went up 40% and then, they ended up down, or the end of the day, that's not normal. As much as we've seen these big swings throughout this summer we've not seen a swing like that. I was just a, just in awe to see, UK front month over four pounds or, 400 pence per firm. It's just, but front month TTF did say on Monday I could see a hundred euros being hit, but I didn't imagine it would hit about one 60, to be honest. I think it is, come back obviously, as we know yesterday and. Today on Thursday morning. It's coming down a bit. But it just, yeah. It highlights the nervousness and about this market and as we've, we all say the same thing about how tight it is and the various reasons why. If you look at the Jkm that shot up as well. Asia don't want to get caught short, like last winter, we all remember what happened last winter. Where we had, we had a plethora of events and outages, supply concerns, charter rates, et cetera. Also, sure I've got hardly any LNG in, in, in winter last year compared to the previous winter. When we were the, again, we balanced the market, whether it's in terms of dumping iwan, unwanted volumes. Or we can, help balance the market now. So that's, it's always the case. We are the, Northwest Europe is the, the balance in region for global gas. Really. And we've seen that in the last two years. If you look from 19 to 21, there's been huge differences from oversupply. Now we've lurched straight into undersupply, so I. We are far too reliant, I think on that, on l and g, and you can see that in some of the price movements and concerns for this winter.

Richard Sverrisson, Editor-in-Chief, Montel: 14:00

What are your expectations for the coming weeks, Wayne? Do you expect to see the volatility to continue? We'll have 40% up and 50% down, or what do you think for the,

Wayne Bryan, Director, European Gas Research, Refinitiv: 14:10

I think that 40, 50% could happen again, but I'll be loathed to say it wouldn't move as much as that. We're seeing some. Demand side response. Now with, big fertilizer companies, obviously in the uk they're back online, but we can still see a fall industrial production. You looked yesterday as the last few days, there's been news breaking of large producers of whether it be zinc or other manufacturers saying, Hey, these prices for us, it's unprofitable. We can tell we'll stop production because it's not, I saw a Hungarian company yesterday said the same. Every one Euro increase adds a quadruple increase on their actual costs. People are also passing these costs down to end users, which is also helping this energy inflation that the whole of the European Union is, seems to be worried about and talking about a lot more. So I think the sort of 40, 50% it can happen again, but I think we'll move back to where we were before these last few days. 10, 15, 20% swings maybe. But again, it. It depends on what news is coming. We had this news about the weather. We saw the effect on prices on a bullish front. We had this news from Russia. We saw the effect on a bearish front. So it just takes something, imagine forties pipeline went down tomorrow, these things are there, they can happen, they can happen. Like we've seen, we saw Hammerfest go down. I think that's not back on until next year as well. So these things can happen if we get. Anything unplanned outage wise, we saw the IFA interconnector, maybe some more French strikes. Anything like that tightens this market can have a sort of exacerbate the effect on price movement. So I think the 40, 50% like we saw yesterday, I'll be amazed if we see that again, amazed. It's probably too far of a word, but I'll be surprised if we see such a move intraday like we saw yesterday. That. An extraordinary set of circumstances. Saw, saw that happen. We had talk of some short positions being closed due to exposure. We had the Putin situation. So we had a few events yesterday that sort of fed into this extreme price movement that I, yeah, I don't think we could see that again, but you might have some comments that come out next week. We won't be supplying additional gas due to we, will we trace those gains or those losses quite quickly, I'd imagine.

Richard Sverrisson, Editor-in-Chief, Montel: 16:06

Yeah. And Asia's obviously crucial here. You mentioned Asia. What are your. Forecast for demand there. We saw prices rise up to, what,$55 per MMB to U in the Japan, Korea, Northeast Asian market. What do you think here, Wayne? How much of a driver is that gonna be in the coming quarter?

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

Huge. Yeah, huge. Because we look at the, if we are talking about l and g, we only expect about another two BCM into Northwest Europe on top of what we saw last year, which is quite meager. And again, it's been the huge growth in China that caught everyone by surprise last year. Latin America as well, seen the droughts there. Brazil has taken away a lot of LNG cargoes that should have come into Northwest Europe. So what we see there is Chinese demand is gonna be key. I think if you look at what's happening there Now, in terms of Chinese economy, there's a few headwinds at the moment, but you've seen what the government have been saying or the NDRC about. Power shortages. They've ordered a ramp up of production of gas, coal, a ramp up of imports. And again, they don't want a supply crunch. So China's key actually to this. We don't see Chinese growth to be as large as last year. I think last year it grew by at least, I think we had an additional seven to eight BCM of Chinese demand. We don't think that will happen again this year. But it depends on the economics of what goes on in China. We think looking at Chinese demand, again, if it falls by 2% or 3% and then we lose imports of about 1.1 BCM. So it really is uncertain of what's gonna happen in China, but we still south and southeast Asia as well. On the rise, you've seen Thailand, Vietnam, picking up Pakistan, India, Bangladesh, as well as their demand increases and we think we see about a 10% increase there. So there is other demand pockets. You've got Japan. They've got an additional, I think additional, they've got eight reactors online now. So again, we're seeing their output or their actual demand to slow. But again, these nuclears might not come back online. We might have some further problems, which again affects the sort of balance you've got South Korea. They have South Korea have, numerous mission policies, which we're waiting to find out about. Which could affect how much LNG they import. So Asia's very important, and again, in on the industrial side of it, it's extremely important. About what we see going into China this year. And it will have a huge bearing on what comes into Northwest Europe. And if you look at the Asian prices, it tells you that they again, don't want to get. A repeat of last winter. So what we might see is as we move into, if we do get a bit of a milder winter and move into sort of Q1, we might see like last year towards the end of Q1 a ramp up of cargo arrivals into Northwest Europe. But again, it's, the weather is one of the big uncertainties so far, and that also will drive what we see in terms of demand from China.

Richard Sverrisson, Editor-in-Chief, Montel: 18:45

Everyone wants this gas. It remains to be seen as you say, how much of it will actually come to Europe? At what price, what prices need to be to attract that into the European market. But let's talk a little bit about the market dynamics, Wayne, in the sense that, we see backwardation in the market. We see as in prices further out on the curve, are far below what they are now for the near term. What kind of impact is that having on, on, on traders books, do you think?

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

Yeah, It's a very good point and you've seen a lot of people are exposed to this market, especially if you're on the short side, which kind of links into, if you look at the UK suppliers that have gone bust, typically some of these smaller suppliers that have massive exposures short term. Whereas if you look at the big players like your British gases, et cetera, they generally hedge their residential con consumption or residential books, domestic demand two, three years ahead. So these smaller players getting caught short, it just shows you the amount of people are still open. Some people would've had open positions betting on prices to start softening and having that exposure like we saw, there's gonna be a big liquidity problem.'cause the margin call required for some of these open positions like we saw yesterday, those rumors of a big, a closing of a big position, which helped accelerate some of that movement we saw. So I think the credit risk is rising and I was speaking to someone within the industry about this last week and one of the comments they made that now a lot of the suppliers, and I imagine it's the same in across Europe now raising their credit. So normally to take out a supply contract, there'll be an amount of credit they'll allow you, and that them credit now is tightening a lot more'cause we're seeing companies go outta business and how are they're gonna pay these bills. So even the suppliers now are starting to, tighten up. And I think that's happening across whether you are a producer, whether you are sorry, whether you are, a supplier, whether you are an actual trader, whether you have clients to actually buy energy for, or you are just prop trading, which you'll see in a lot more. A lot more people have come into this market now due to the volatility. It's been exhibiting, we're attracting a lot more of the hedge funds and again, that helps explain the speed of some of these moves. We see some, maybe some algos or black boxes, because some of these moves have been highly irregular in terms of what we've seen. And liquidity, if you look at liquidity and volumes, they're up at record levels, which shows you there's more players in the market. So when we see something like yesterday. It cascades on the downside. But yeah, these prices at these levels have been causing huge concerns when it turns to margin calls and credit risk and that will continue and it will tend knock some players out the market. People have to close these positions now because you can't be exposed anymore. It's too expensive. Absolutely. Yeah. And it's the same in the power market as well. Power prices are high watering and we're seeing, again, a lot of intervention might be needed. Energy inflation is coming or it will be here. I've seen the actual predictions of increases on bills across Europe and it's quite startling really.

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

So you're saying some of the volatility we've seen in recent days and weeks is due to hedge funds? Yeah. Perhaps from the US entering the market and being quite active as well as black box trading there.

Wayne Bryan, Director, European Gas Research, Refinitiv: 21:39

I wouldn't say Where they're from the US or not, but yeah from, yeah, we've definitely seen increase in activity and you can look at the, the ice volume reports and it'll show you there's a lot more interest at record levels. In these contracts and open interest as well. There's a lot of people, on either side of the fence here, waiting for outcomes. So when we see these swings, it forces, whether it's compliance buying, you're hitting stop losses on either side. So again, you're being forced to buy more. And again, yeah, we are seeing more of these, definitely more influence from people who won't be taking delivery of these of this gas, which only makes it, not say unfair is the wrong word, but it increases the strain. On those that are expecting delivery, those that are, really exposed, like these smaller suppliers, like these big manufacturers who are really getting caught up in this.

Richard Sverrisson, Editor-in-Chief, Montel: 22:24

As you mentioned, you're saying industry is suffering consumer bills Yeah. Are gonna go up. We're seeing the role of speculators in these markets. Yeah. In a sense. Do you think that will increase the call for some kind of political intervention? We're seeing the noises in certain European countries that, maybe. If consumer bills are up because of hedge funds activity, maybe that's not very politically sound. Do you expect any moves to

Wayne Bryan, Director, European Gas Research, Refinitiv: 22:47

There's been already rumors of political intervention, but I was reading something, they were talking about having, a regional, let's buy gas for the regions, how would this possibly work? It's noise. And also it's, it highlights, I think even Putin said it, it highlights that. People did say, that the spot market might not be the best way forward, just putting everything on the spot. Longer term contracts do have their benefits, and we've seen that. And again, it was highlighted yesterday by Putin about that. So I think intervention, they're talking about it, but to actually, to go through and actually implement, looking at some of the things they're trying to think, talk about doing. I don't see it. Maybe in the carbon market they can, they can release more, permits into the market will help down push that price. But in the gas market, I think it'll be hard. And you can't put caps, how could you put a cap on the, I saw someone about cap on the wholesale price. That's never gonna happen. Let's be honest. Defeats the whole object of the market. You put a cap on the wholesale, natural gas market, it defeats the whole point of it. So I think intervention, yeah, intervention might come by way of, let's facilitate the speeding up of this certification process. And of course, the unbundling process as well. That might be some political intervention, but in terms of anything else, think they're gonna find it hard when I look at some of the, potential ideas to actually implement these. So

Richard Sverrisson, Editor-in-Chief, Montel: 23:58

Wayne, thanks ever so much for joining the Montel Weekly podcast. Great to have you on board again. So thank you again.

Wayne Bryan, Director, European Gas Research, Refinitiv: 24:04

Thank you. You're welcome. Always a pleasure. Have a great day.

Richard Sverrisson, Editor-in-Chief, Montel: 24:07

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