A New Gas Shock?

*** This episode was recorded on Wednesday before attacks on Qatari and Iranian energy infrastructure. But the message from the guests is still highly relevant - the wholesale gas market has not fully priced in the geopolitical risk premium. 

In this second episode of our special series on the war in Iran and its implications for energy markets, we focus on a potential looming gas crisis. As Europe enters the crucial storage refill season with lower-than-usual inventories and a far more complex global backdrop.

Competition for LNG is intensifying, particularly between Europe and Asia, while geopolitical tensions in the Middle East are raising the risk of supply disruption and renewed price volatility.

So how exposed is Europe this time around? And could this crisis prove even more severe than 2022?

Riichard speaks to Saul Kavonic, Head of Energy Research at MST Marquee, who warns that the current disruption could trigger a deeper global gas shock.

In addition, Ole Hvalbye, Commodities Analyst at SEB Research, joins from the trading floor to break down price scenarios, storage risks, and what comes next for LNG supply.

Host: Richard Sverrisson – Editor-in-Chief, Montel News

Guests: 

Saul Kavonic -  Head of Energy Research, MST Marquee

Ole  Hvalbye - Commodities analyst at SEB Research

Laurence Walker - Deputy Editor-in-Chief, Montel News

Editor: Oscar Birk 

Producer: Alexandra Carlon

#EnergyCrisis #GasMarkets #LNG #NaturalGas #EuropeanGas #EnergyMarkets #Commodities #TTF #EnergySecurity #Geopolitics #MiddleEast #OilAndGas #EnergyTransition #MarketVolatility #GlobalEnergy #Podcast #EnergyPodcast #Montel #PluggedIn

Transcript

Richard Sverrisson – Editor-in-Chief, Montel News: 0:05

Hello listeners, and welcome to Plugged In - the Energy News podcast from Montel News, where we bring the latest news issues and changes happening in the energy sector. This is the second episode in our miniseries examining the Iran War and the current energy crisis. In the first episode, we looked at the broader geopolitical and economic forces driving volatility across global energy markets. Today we're narrowing the focus to gas, which is once again emerging as the key pressure point and price driver for wholesale energy markets. Europe is entering the crucial storage refill season, but levels remain relatively low and market conditions have shifted compared with previous years. At the same time, competition for energy cargoes is intensifying particularly between Europe and Asia. While the conflict in the Middle East is raising fresh concerns about disruptions to global energy flows, all of this is creating a delicate balance for gas markets. With traders watching storage levels, LNG supply and geopolitical developments closely as a continent prepares for the months ahead. We'll hear from Saul Kavonic, head of energy research at MST Marquee, who explains why the current disruption could prove even more severe than the gas crisis of 2022, and Ole Hvalbye, a commodities analyst at SEB research to look at where prices could go next. To set the scene, I'm joined by Montel's, deputy Editor in Chief Laurence Walker, who will walk us through the latest developments in European gas storage and market sentiment. A warm welcome to you, Laurie.

Laurence Walker - Deputy Editor-in-Chief, Montel News: 1:39

Thank you, Richard.

Richard Sverrisson – Editor-in-Chief, Montel News: 1:40

We've certainly had to recourse for a lot of your knowledge and insights of the past few weeks in this current energy crisis. But my first question is really, there's an issue around gas storage in Europe. How are plans progressing to fill storage facilities?

Laurence Walker - Deputy Editor-in-Chief, Montel News: 1:55

Certainly, I mean, if we look at storage over the past couple of weeks and see since war began, it's been fairly. Fairly static. We are looking around 30% at the moment. Obviously to get to that level of sort of 80, 90% by winter is, understandably gonna be a challenge. And I think people are appreciating that more and more. There are faces, challenges financially. We have a premium at the moment for the summer contract over the winter contract, which does not incentivize stockpiling. It's only a small premium. Today we're looking at a. A, a Euro or so, but it's certainly we should be looking at a time where people need to fill up, they want to fill up because they know, you know, they're gonna purchase it at lower level, sell at a high level in the winter.

Richard Sverrisson – Editor-in-Chief, Montel News: 2:37

Is that the case across Europe? Is it the same?

Laurence Walker - Deputy Editor-in-Chief, Montel News: 2:40

Basically yes. I think we a similar situation. I think most of the markets are in here in backwardation. So this is a usual sort of thing when you have a price shock that the pro prices jump up. The thing now is obviously how long this crisis lasts, because if we're gonna maintain this backwardation that could be a problem going forward.

Richard Sverrisson – Editor-in-Chief, Montel News: 2:58

And how in general are markets reacting to this, I mean, particular gas market participants to the crisis? Is the sentiment jittery? Is it nervous or is it, is it even complacent?

Laurence Walker - Deputy Editor-in-Chief, Montel News: 3:09

I wouldn't like to use the word complacent, but it's fairly clear looking at the pricing over the last few days at least, that we've been fairly steady whether it's that the market is looking for clearer direction, they're waiting for President Trump to say something which sort of gives signal to the market they're waiting for. Some change in the war, maybe some change related to this strait of Hormuz. It's hard to say, but certainly it's almost surprising how steady pricing perhaps has been for the last few days, but say, yes, I think jittery is very much the case. People are still very nervous, people are very worried about what is likely to happen.

Richard Sverrisson – Editor-in-Chief, Montel News: 3:47

And probably closely following President Trump's social media feeds. I think that's probably gives a clear indication of where markets could go, but what are you hearing in the market? Where could prices go in terms of continental European gas prices? Laurie,

Laurence Walker - Deputy Editor-in-Chief, Montel News: 4:00

it's, how long is a piece of string really? A lot depends on how long this continues. So obviously the longer we have the Qatari LNG outta the markets, the price premium will be, so far, probably most of the at least Qatari energy that we has been shut in. We're seeing cargo still arriving, around this time that, that it set off, around the time of the war.'Cause they've been taking the long route around, around South Africa. I think it'll become more acute probably next month we'll fill that pinch a bit more. We are already beginning to see Asia taking more cargoes as well, so there's certainly a recipe for higher prices, hard to say, but yeah, it's cer certainly a little higher than now I would say if this does not get resolved soon.

Richard Sverrisson – Editor-in-Chief, Montel News: 4:41

Yep. That's what all hinges on, isn't it? Whether when and the straits can be opened again for the shipment of oil and gas in particular. Lorie, thank you very much for being a plugged in guest this week.

Laurence Walker - Deputy Editor-in-Chief, Montel News: 4:54

Thank you, Richard.

Richard Sverrisson – Editor-in-Chief, Montel News: 4:55

So that's the current picture in Europe. Storage levels under pressure. Prices steady for now, but markets clearly nervous about what could happen next. But the bigger question is what this crisis means globally. If the conflict in the Middle East continues to disrupt energy flows, the impact won't just be felt in Europe. It could reshape gas and energy markets worldwide. To dig into that in more detail. I'm now joined by Saul Kavonic, head of Energy Research at MST Marquee. A warm welcome to you, Saul.

Saul Kavonic - Head of Energy Research, MST Marquee: 5:27

Thank you so much. Always a pleasure.

Richard Sverrisson – Editor-in-Chief, Montel News: 5:29

Great to have you back. What are we looking at now? Are we looking at a repeats of 2022 or do we even have to go back to the 1970s in that kind of oil crisis? How severe is this current situation, Saul?

Saul Kavonic - Head of Energy Research, MST Marquee: 5:42

In the immediate term, it's a lot more severe of a situation than we saw in 2022. But in the medium to longer term, it's likely to not be, have as big an impact. The reason it's more severe is, first of all, there's more volumes of LNG which are being disrupted. So when Russia turned off its gas to Europe in 2022, that had an impact net of about 60 million tonnes per annum, higher LNG demand. Right now we're seeing 80 million tonnes per annum of LNG shutoff. So just in terms of that scale, it's larger, but it's compounded by the fact that in 2022, when Russia turned off that gas, there were a lot of easy levers to pull to reduce gas demand, increase efficiency, particularly in Europe, but also withdrawn effects to Asia. And the reality is the market is still structurally much tighter before the Iran War started in gas, that is wake of that Russian gas turning off and all those easy levers to pull on demand management and supply substitution have already been pulled in 2022. So they're not available to be pulled again in 2026. So that's the first compounding factor and the second compounding factor is that oil is now facing a pinch point at exactly the same time, as well as seaborne fertiliser. And one of the biggest impacts here, which is not in the headlines as much today, it is actually a bigger impact on food than on gas or oil. But what happens when you've now got a pinch point in oil. We can't do easy substitution gas to liquids in some markets, and there's gonna be a pinch point on fertiliser, which is gonna drive up demand in gas globally to make up for one third of Seaborne fertiliser, which is also disrupted to the strait of Hormuz. And lastly, which is perhaps the least appreciated compounding factor here is this time it directly impacts Asia. So last time it was a second order impact into Asia, and particularly emerging markets in Asia and in Southern Asia and Southeast Asia ultimately ended up being out competed for gases europe sucked the volumes away. But this time most of those Qatari volumes going to Asian markets. And so now some, major LNG importers in Northeast Asia are gonna have to scramble to make up those volumes, which puts them in much more direct competition with Europe particularly the time as Europe's obviously come out of its winter period with, close to record low stocks in gas right before a geopolitical event once again. And so this is why when you put all these things together, it's a much bigger impact. Now, the mitigating fact. Here is, this is not necessarily permanent. So once the war ends, or if we see at least partial flows restarting to the strait of Hormuz, then we could start to see some oil and LNG exit again. But if this ends up being a prolonged disruption and prolonged domain just a few months, then I think we're gonna face a much bigger gas crisis than we did in 2022, and also a much bigger gas crisis than we'll face an oil crisis. Because there's far less mitigation measures in gas than there's gonna be for the oil supply disruption.

Richard Sverrisson – Editor-in-Chief, Montel News: 8:56

So where's the crunch point there? Is it like, three months, four months in terms of, hitting that, that sort of levels of crisis that we saw in 2022 and going beyond that?

Saul Kavonic - Head of Energy Research, MST Marquee: 9:06

I think it's about one month. So

Richard Sverrisson – Editor-in-Chief, Montel News: 9:07

one month. Really? Okay.

Saul Kavonic - Head of Energy Research, MST Marquee: 9:09

Look, so there's still Asian demands. There's been, absent the war, the edge of demands being a bit sluggish stocks, it takes a few weeks for those LNG stocks to deplete. Unlike oil, they don't, the stocks only last a few weeks, not a few months. So I think that crunch point really is gonna come if we're heading into the middle of April and their LNG is still largely not flowing, then we're in demand. Destruction territory and demand destruction, driven pricing and demand destruction driven pricing is much higher than, the current forward curve of, just around 20 or even less dollars an MMBTU at the moment. The market appears to have be very complacent. I'd argue even to date. It started to change over the last few days about the duration of what this war could be and disruption could be. It's largely be pricing in everything kind of reverting back to normal by the end of March, and I think it's gonna be increasingly clear that's increasingly unlikely. I think the other thing that's missed is hypothetically, even if the war ended tomorrow, Trump declared victory packed up and left, there's still going to be a one to two month period. It's gonna take to restart a lot of both oil and LNG production. You can't start 80 million tonnes per annum of capacity in a week.

Richard Sverrisson – Editor-in-Chief, Montel News: 10:28

You can't flick a switch.

Saul Kavonic - Head of Energy Research, MST Marquee: 10:29

That's already, even if you restart today, it's gonna put pressure on LNG stocks and on oil stocks. And that's before factor in the scope for some direct military action that might actually do some lasting or permanent damage to some of the oil LNG infrastructure, which means then it could take months or even years to return to its capacity once the war ends.

Richard Sverrisson – Editor-in-Chief, Montel News: 10:51

Yep. These are certainly the consequences of that action, but I think you could add to that massive inflationary pressures here as well, because if you are looking at, what you mentioned about fertilisers, the impact on food production and just energy prices. This is obviously gonna add to that kind of pressure, but what do you think is the most optimistic horizon then for the strait of Hormuz to be defacto open again or to have that flow going through there again?

Saul Kavonic - Head of Energy Research, MST Marquee: 11:14

Well, the most optimistic scenario, which is not necessarily the most likely, is actually that the US and its allies win here and remove Iran's ability to actually threaten strait of Hormuz. And then passage opens up again. Let's assume that could happen by the end of the month, so the next two weeks, then you'll start to see LNG ramping up through April. You'll have most of the capacity back probably by the end of April. If not a couple weeks after that. Oil will be in the same category. Then we've just had to deal with essentially a two month disruption for LNG and oil. Oil will manage better than LNG. I think you still face quite a bit of price pressure towards that middle of, to end of April mark just because of where stocks will be, particularly in Asia. But the market will be able to look through it and see it as a bump rather than a major structural shift. And then if Iran actually saw itself adopt a more moderate governments, which was welcomed by the west. You'd actually see a flood of investment ultimately return into Iran, which would actually be quite excellent for markets and the economy. And I'd say arguably rather bearish longer term for LNG. Iran has the best gas resources in the world. It is Qatar, and then some, right? But that's the most optimistic. I think perhaps a more realistic but still optimistic pathway is we get partial returns through strait of Hormuz, either via a deal with Iran and some of its customers, or via a Navy convoy system which at least perhaps allows a half of that 80 million tonnes to return to the market. And that then puts us in a different situation where it'll still be tight, but much more manageable. Particularly as we've got some more LNG volumes ramping up outta the US at the same time. And some demand destruction in Asia, and we'll get we'll get through that in a more managed way. So I think that's perhaps at least at this point in time a more realistic, but still relatively, relatively optimistic.

Richard Sverrisson – Editor-in-Chief, Montel News: 13:09

But in terms of the practicalities of aiding the transportation of oil and energy through the straits there, you've got mines, you've got potential attacks from land. How can that convoy restrict to that or limit any attacks on those ships?'Cause it's, obviously there is the insurance element, but it's also the ship owners don't wanna endanger their crew and their, by going by taking that precarious journey through the strait then certainly not close to the Iranian shore.

Saul Kavonic - Head of Energy Research, MST Marquee: 13:34

That's right. So the risk for the ship owners is threefold. So one is it's the safety risk to the crew on the ship. The second one is even with insurance, if your ship is destroyed, your insurance won't cover all the consequential loss of not having that ship for the next few years while you go get a new one. And lastly is, a lot of these ships and particularly the LNG side. There's a backlog. You can't get a new ship in 12 months. It can take five years to get your ship back, particularly if it's one of the larger ones. So I fully agree with that. The question is how much is Iran's capabilities ultimately degraded? I know there's a, an increasingly widespread view that the military action by the US and its allies is mostly in Israel here, has not been very successful in degrading that military capability. I would just perhaps, I think it's premature to come to that, to get the land in that campaign. It's been two weeks. Two weeks is a very small window for a major military campaign and, give it several more weeks and they might actually be able to achieve quite a bit, a large outcome militarily. So I don't think we should rule that out, which combined with the navy escort system. Could actually achieve some of that outcome. Or like I said, you start to get pressure from the likes of China and Pakistan and India and others directly with Iran to at least allow partial resumption of flows on a voluntary basis. I think we need to also take that with a grain of salt because right now the only card Iran seems to have to play is to weaponize the global energy and food and economic crisis to put pressure on, and I'm not sure they're gonna give that card up that easily under pressure from China and others. But you asked about scenarios. Those are the optimistic scenarios. I think the issue we have with the market right now is the market is pricing in the more optimistic end of the scenario spectrum here, and has not been pricing in the full breadth of the scenarios that play out here, which include a prolonged conflict, a prolonged disruption even if partial flows return to the Strait of Hormuz, still what that means for the part that's not returning.'cause even with a successful convoy system, which mean that people forget, even if we have a completely successful convoy system with no attacks that get through, you're still likely to get only 50 to 70% of total flows to the strait. So for oil. You could see a largely a resumption of full flows in that scenario because you've also got the diversion east, west Saudis through the Red sea. But for LNG, you'd still be left with quite a significant disruption. That's the breadth of the scenarios we're looking at here. And when you look at pricing, where oil's up, 40% lgs not even doubled anymore. That seems to me to be quite a complacent response. So from so far from the market, I think it's very much because the market has cried wolf so many times, particularly on oil since 2022. There's been a geopolitical risk in the headlines. We've seen a risk premium come on, and then supply disruption hasn't happened. But now that the doomsday scenario is actually playing out now, nobody believes the wolf's actually here. And so we've got I think been a very belated response. And it's only been over the last maybe four or five days, you've seen oil actually start to move properly above a hundred dollars. LNG is different, LNG doesn't have risk premiums like that. LNG's gonna trade much more on the fundamentals of the month forward or even the week forward supply demand balances.

Richard Sverrisson – Editor-in-Chief, Montel News: 17:02

If we see it drag out to the end of April, maybe into May what would that do for all prices? Could we see, go north of 150 for example? Gas prices hit a hundred euros megawatt hour in Europe. Are these likely scenarios should we see a prolongation of the war and the extended closure of the Strait of Hormuz?

Saul Kavonic - Head of Energy Research, MST Marquee: 17:23

Look, I think if we're at the end of April, the strait of Hormuz is largely shut still, and there isn't a very clear line of sight to that being resolved at that point, then oil is $130 a barrel plus which is demand destruction territory. And I think LNG will retest the highest seed in 2022. Which means, sorry, I'm in Asia, so $50 and there were BTU plus pricing. And I think that's a relatively counter consensus for you to take at the moment. But I actually struggle to see how you don't end up in a world like that with a disruption of this nature for that long.

Richard Sverrisson – Editor-in-Chief, Montel News: 18:00

And that's obviously extremely concerning. And then the other aspect is. What's it gonna do to, if Trump is ordering or wants his NATO allies to go to his aid in the strait and in the air in the Gulf, and they are reluctant to do that puts strains on the NATO alliance and potentially have implications in other geo geopolitical arenas, for example, Ukraine.

Saul Kavonic - Head of Energy Research, MST Marquee: 18:21

Yes. And perhaps even more acutely in the Pacific. What we're seeing now. The idea that Iran would or there'd be a closure of the strait of Hormuz has been war game since the 1970s. It's the reason SPRs have been put in place all over those years. It's the reason Saudi has built that east west pipeline. So there's been mitigation measures in place. If you look at the oil scenario, I think the oil scenario is more manageable because you have a 20 million, if we can walk through mats, you've got 20 million barrels a day of supply, through the strait. Now one to two of that is a radian and still go through,'cause the radian don't attack their own tankers. You can probably boost another 5 million barrels via pipeline east, west or to which, takes that 20 down to 13 SBR releases from the IEA can probably add three to 5 million barrels at least for a few months, perhaps even a bit longer than that, which takes you to eight to 10 million barrel disruption. China can, if it wanted to, could probably unleash another two or 3 million barrels a day. So that brings you your 20 million barrel a day disruption down to five to 8 million barrels a day. And then if we see a partial resumption of flows like we've seen in the last 24 or 48 hours, for example, some tankers being allowed to Pakistan and elsewhere, that, you could get even less than that. And while still a big disruption, it's manageable. LNG is different because LNG does not have any alternative routes through via other than Strait of Hormuz. There is no global emergency stocks of LNG and European gas stocks are low and the US market is not connected. Trump is going to care far less about a global gas crisis and a global oil crisis because a global gas crisis is actually good for Trump. And remember, if global gas prices are high, Henry hubs still stays low. So that actually makes us more competitive, more jobs, more industry, and more investment go into the US. Lastly is to the extent that the convoy system has restrictions. LNG is not necessarily gonna be prioritised the same way oil is. And so you put that together, I think, a lot of the headlines are on oil, right? And I think that's because, people have a much more kind of retail lens and all visibility onto that. But the, it's gonna be, it's already has been a much faster and more severe impact for gas. And there'll be an even far a slower but much more severe impact for fertiliser and hence food on top of that.

Richard Sverrisson – Editor-in-Chief, Montel News: 20:41

And generally from energy prices and inflation in Europe. Saul, thank you very much indeed for being a guest on the Plugged In podcast.

Saul Kavonic - Head of Energy Research, MST Marquee: 20:49

Thank you.

Richard Sverrisson – Editor-in-Chief, Montel News: 20:50

So we've heard how this crisis could play out globally and just how significant the risks are if disruptions persist. But what does that mean in the market right now for prices, for storage and for Europe's ability to secure supply ahead of next winter? Now I'm joined by Ole Hvalbye, Commodities analyst for SEB research. Welcome back to the pod Ole. You are joining us from the trading floor. These are very busy times for you. I'm sure.

Ole Hvalbye - Commodities analyst at SEB Research: 21:15

Yeah, it is quite hectic and as I just mentioned, I can't leave the floor right now. So we are taking it here.

Richard Sverrisson – Editor-in-Chief, Montel News: 21:20

Yeah, fine. That's absolutely fine Ole. Absolutely. So there may be some hubbub in the background, but that's perfectly understandable. Obviously the war in Iran has had a massive price impact. What have you seen so far and what are your expectations going forward, Ole?

Ole Hvalbye - Commodities analyst at SEB Research: 21:34

I think it's important to start with the price development we're seen. I was quite actually surprised that we did not have any geopolitical risk premium priced in at the TTF at all before the weekend of the attack. You saw that the oil price was climbing actually slow and steady since 1st of January, all the way through January and February while the TTF was actually hovering around 30, 30 plus, 32 before the week of the attack. Speaking in Euro terms in the TTS before spiking up to around the 60 plus level. So basically a doubling prices, which of course tells you how nervous the market is. So that was for me, a bit surprising to be honest. And it's also important to mention that even though the strait is not formally being closed, the risk of failing through the strait of Hormuz. That's what we all talked about. That's what we all affair as well, and what that mean with the current or the supply going forward. So now. Everyone is wondering, okay, how long would this situation last and what are we likely to see going forward? And I think in terms of what we can calculate, that's of course the fundamental side of this. And if you look at the fundamentals, we are basically losing around zero point 21 metric tonnes of LNG on a daily basis through the strait. In that deck that sums up to be around 6.5 metric tonnes on a monthly basis. And as we now stand in the day 18 of the conflict with zero LNG flow through this rate, we have lost as so zero point 21 times 18 and it now it looks like we, we are heading to this one month of 6.5 metric tonnes on the month. So it's definitely a sizable loss into the market. I can also say that it's if you look into the global gas consumption overall, which was around 4,200 BCM last year, or yeah, in 2024, that's the latest numbers we have. The global LNG trade in 2024. As a comparison, it was 555. So the LNG share as a percentage of the global gas demand overall is only 13%. But as we all know it's the marginal cost of supply, which is setting the prices both in Asia and in Europe. So it's definitely a dramatic situation we are currently looking into.

Richard Sverrisson – Editor-in-Chief, Montel News: 24:04

The outlook going forward here. Everything hinges on of course, how long the straits are gonna be closed. But if we go into, April, potentially even May, what will that do to, to prices in Europe, even though Europe doesn't get that much of its LNG from the Gulf, but still it obviously has a price impact.'cause it's a global market.

Ole Hvalbye - Commodities analyst at SEB Research: 24:23

We're basically updating our scenarios on a weekly basis now, or on a daily basis because this goes so fast and we're not quite sure how this will end. But just looking at the status queue with day 18 into the conflict. My base case now is that, that this will actually last for two months, and I think the market is as is underestimating a bit of situation we are in. If you look at the current market prices, which is 50 51 euro per megawatt hour going forward, that means that the market is actually quite optimistic. And they are believing that we will see flow already at the end of March. Otherwise the price will be way different. So in my opinion, two months is probably the most realistic scenario, and that's, I have given that a probability of around 40% and then a 35% for one month, meaning that it will, we will now open or get increased flow through the strait of Hormuz within two weeks time. What I'm saying here is that if you look at into the two month scenario seems from my point of view to be a more realistic scenario, we are talking TTFs at somewhere between 85 and hundred 20 euros. This is very high prices and we will we'll spread directly into the TTF in the European market and directly into the poor market as well. That's at least how I see it from my perspective now. And I think why it's important to be realistic here is definitely the fact around the closure of LNG infrastructure. If you look at the LNG production, which is completely halt, that's Ras Laffan facility in Qatar, we have seen that statements from themself that it will take somewhere between two weeks to one month to restart that facility. And what I think find most interesting is that this Qatari LNG facility has never been closed before. So they don't know how this will react when you start opening again. So that's why even though the market is looking into a likelihood of increased flow for over two weeks. I think they're underestimating the seriousness when it comes to restarting LNG export facility. So looking at the restart timeline it's not weeks, it's could be months, it could be one and a half months from now until we, we are seeing flows coming out. And I also heard it's probably not rumours, but some experts stating that, this Ras Laffan facility would not export any LNG before, before into July and August. And that's and that's a scenario when we will get the sort of cease fire or a deescalation already in March. Also, they have stated themself that they cannot restart the facility before they have some sort of a hundred percent certainty around a proper deescalation or actually a proper ceasefire. They cannot operate that facility in a war scenario. That's what they've been saying,

Richard Sverrisson – Editor-in-Chief, Montel News: 27:31

Absolutely. And of course if or should Iran become desperate in a desperate situation, forced into a corner, there's a high likelihood that energy infrastructure would also be hit. Until that time, there's also still quite a big risk at the moment.

Ole Hvalbye - Commodities analyst at SEB Research: 27:46

Definitely all the infrastructure in the Persian Gulf is very sensitive to potential attacks and hits. And of course that's what I believe all market actors and all traders and people looking into this market are most afraid of basically that we are losing infrastructure. One thing is closing down due to force, mature and due to field inventories, which cannot be, does not have any chips to offtake the volumes. Another thing is the fact that if you lose the facility, it will take years to put it back online and then we have a complete different situation. So I fully agree with you on that.

Richard Sverrisson – Editor-in-Chief, Montel News: 28:24

Yeah, so then we're in a kind of quite elevated gas price scenario, and if we're talking July, August for restart, then you know, as you're saying, 120, even north of 120 euros a megawatt hour is looking quite realistic. And it's interesting, you're noting that the market is being, is quite optimistic in terms of the looking at the ending of the war and the impact on prices. But what does this mean? If we're talking here Ole about these kind of price levels. Then what does that mean for storage in Europe ahead of the winter?

Ole Hvalbye - Commodities analyst at SEB Research: 28:52

Excellent question. And if you're looking at the inventory that we already have now. I have the lines in front of me here now, and I see that European gas percentage fill overall is now at close to 29%. And this, as we know is slightly about 10% lower than the 10 year seasonal average. So this is not of course, normal science at all, but what we have seen is that the drawdown rate has slowed. Which is also natural that we are now in late March and heating season or the new gas air or the gas air is closing in just a matter of two weeks. But going forward I believe that, this is levels that really makes it unsustainable for Europe. And my biggest fear is that if you have these two month scenario, which I believe is the most realistic one. The summer injection will partly be destroyed, because we are losing, or the market are losing them on a two month basis, we're losing 14 million tonnes of LNG. And that's of course very vulnerable for the European market as well, and not only the Asian market, which is the largest off takers of these Persian, the Gulf volumes. But so inventories is really interesting. I think it's also super interesting to look at the inventories in in Germany as well, which is now 22% low compared to a historical number of 43. So we're 21 point 75% below the 10 year average. And looking at similar effect in the Netherlands, which is also an important gas consumer or the European gas roundabout in at the continent, there we see a 7.6% field. Never seen this low targets ever before. So what I'm trying to say is that the overall inventor situation in Europe is quite bleach. It's not any good sign and it's also what I'm trying to, before this crisis happened, I was trying to express to internally with my traders and clients that if we get a supply disruption in the market, the European market is not at all prepared for this, given the very low state of the inventories. So I'm seeing that it will be difficult to refill the inventories. But it all depends again on the timeline we're talking about in terms of restart or in terms of increased flow to the Strait of Hormuz.

Richard Sverrisson – Editor-in-Chief, Montel News: 31:24

So in, in terms of market dynamics here Ole there's no real incentive to fill the storage, the gas storage facilities at all. Because the summer winter spread is such that you, that's not really gonna happen. So there needs to come maybe from somewhere else. What are the options on the table here to fill this storage and get it up to, they're talking 8% is the minimum by November. How is that gonna happen?

Ole Hvalbye - Commodities analyst at SEB Research: 31:45

Yeah, we're talking about 80%, preferably 90% by November. But that has been a bit like it's optional supply, no optional policy. But in what we are left with now is the latest, supply corridors into European market is now that we are basically seeing Norway Pipeline supply at pretty much running a full machine. We're delivering the Norwegian Continental shelf is delivering around 3.2, 3.3. TWh per day, and this is very close to 40% of the overall supply into the European continent. So thank God for Norway. This is massively crucial for the European market as we speak. But again, looking at the liquified natural gas corridor on what, how we depend, we are on LNG market is also quite substantial. It's now reached 46.7%. And that's also why we see that the LNG imports continue to set the price. It's the, by far the largest supply source we have in the market. But looking at the pipeline supply we are getting, some great supply from still, some from Turkey, but it's only around 0.5% of the overall supply. North Africa being Algerie, Libya is still supplying at the round 9.5%. And again, as I mentioned the Norwegian Continental Shelf is around 40% now, so the rest of the market is delivering pretty stable pipeline supply. But we also know that the European Commission has stated that they want to reduce the pipeline supply from Russia. Meaning that the, once the volumes that goes to Turkey would, in theory be disappearing in, I think it's by September 27th. And we also know that the Europeans has stated that we want to also remove all LNG imports from Russia already by New Year this year actually coming up in, in start of 2027. What I'm trying to say is that pipeline supply both from North Africa and Norway is very stable, luckily. And we are still feeding the market with a substantial amount of LNG, but I'm also following the LNG marketing quite detail. And what I can see from my chart is that, we had a massive spike in around February and early March with the LNG into the European market. We touched 7.5 TWh per day, which is close to record. And now I see that we are coming down to 5.1 TWh per day. So it's been plummeting lately. And that's of course the price effect we're seeing that we are now competing against, more competing against the Asian market, being South Korea, Japan, China, India, Taiwan, et cetera. And that now the marginal the marginal LNG cargos will definitely be higher priced and then the imports are slightly be reduced as we speak.

Richard Sverrisson – Editor-in-Chief, Montel News: 34:50

If we look back to 2022 when there was a massive push to fill gas storage sites, that's almost like the German government, for example, was criticised for almost issuing a blank check to traders, fill it up, fill up the gas, whatever cost. Are we likely to see a situation similar or have we learned the lesson from them that it was just far, too far, too expensive?

Ole Hvalbye - Commodities analyst at SEB Research: 35:11

I think this is a very different situation now, and I think, the level of seriousness we, we witnessed during the last crisis in 22 was by far way worse from the European market perspective. Remember that around nine to 11% of all LNG going through the strait of Hormuz is directed or having a long term offtake agreements with the European market. So in terms of volumes, we're not that affected at all compared to last time. But again, it is not about volumes, but it's about prices. So I think that we have learned. Partly learned the lesson. And I think we are more prepared now, and this is really putting the system to the test, and I think it's also, if you look at as I mentioned in the introduction with my two months base case scenario, meaning that we could see a hundred plus Euros per megawatt hours. It is a price we can live with short term. It is not a massive crisis, a matter of weeks and months, but it is a massive crisis, a matter of months and months and years. So it really depends on the timing here, and we should really get those LNG volumes up and running again as soon as possible for everyone. But again, back to your question, I believe the European market is a bit more prepared. And I think also that's why we are seeing the spot price now trading around 50 euros. And if you look at the longer dated contract or price to spread route in time is, it's almost like 49, 48 the entire year from now. And you have 2028 prices at 26. And 29 prices at 23, so pretty much back to normal, only a matter of two to three years for route in time. So the market is pricing as this is a short term or a short term chaotic situation, which will be resolved with a matter of weeks and months.

Richard Sverrisson – Editor-in-Chief, Montel News: 37:08

But even, if we're talking this, it is more of a blip or an extended blip if you like then Ole of them we're talking demand destruction, aren't we? That euro 120 a megawatt hour. That's that kind of territory, isn't it?

Ole Hvalbye - Commodities analyst at SEB Research: 37:21

Yeah, definitely. And if you look at just to the calculation here, now, if you have 120 years per megawatt hour. If you translate that into oil equivalents, you'll have a gas price, which is$225 per barrel basically. And of course that's a massive amount of destruction. That's figures we don't want to see at all. And that is figures that will with a hundred percent certainty triggered some sort of demand destruction and of course the market looking into all kind of alternatives and doing what it can to reduce demand. And I think it's, it's some, in some part of the situation we are, we're lucky as well that we are now exiting the winter. The weather situation in Europe was very quite favourable and mild coming into the into the crisis, in and into the war. And also, so that means that the inventors was ticking sideways and not downwards. So there is some lights points there as well with the weather situation. Now we are entering spring by what we are of course afraid of is the the feeling situation again. How much do we have to pay for gas during this, during the summer to get to this 85 or 90% by November, December.

Richard Sverrisson – Editor-in-Chief, Montel News: 38:40

Yep. That's the core question. The core question is, of course, how long the strait of Hormuz will be closed off. So fingers crossed and our prayers are for all those out there on the Gulf, of course, but also hoping for a swift revolution, resolution even to this war. So thank you Ole for being a guest on the Plugged In Montel News podcast Thank you.

Ole Hvalbye - Commodities analyst at SEB Research: 38:58

Thank you so much.

Richard Sverrisson – Editor-in-Chief, Montel News: 38:59

And to you listeners, thanks for listening to this episode of Plugged In. If you enjoyed this discussion, please like, rates, follow to make sure you get the latest podcast episodes as soon as we release them every Thursday. We'd also love to read your reviews of the podcast. It helps us to keep up to date with what you, our listeners, think of the podcast and what content you want to receive more of. Finally, you can head to montelnews.com for more news and analysis from a team of journalists across Europe and beyond. See you next time.