Europe and US markets

BloombergNEF

Europe and US markets

U.S. LNG: Cargo cancellations are unlikely in the summer, but still possible

BloombergNEF’s base-case U.S. LNG export forecast assumes liquefaction terminals run at around 90% utilization between now and the end of winter 2021-22. BNEF’s Global LNG Netback Calculator currently shows that sending U.S. LNG to both Europe and Asia is profitable over this time period. Maintenance events th​​​​​​​at are expected to occur in the shoulder seasons (spring and autumn) and shipping related constraints are the only reasons for reduced output.

 

 

Last summer, U.S. LNG saw large-scale shut-ins driven by an oversupplied LNG market. Global oversupply is just one four potential triggers that could reduce U.S. exports. The other three are:

1. An undersupplied domestic gas market that necessitates gas to stay at home rather than be exported
2. A lack of LNG tanker availability, which is currently expected for February resulting in some cancellations, and finally
3. A force majeure event caused by natural disasters or terminal operation malfunctions – which is by nature unpredictable

 

Scenario: By increasing Henry Hub prices so that profitability of U.S. exports falls to zero, the resulting gas storage levels provide a gauge to how flexibility the U.S. market is before LNG shut-ins. End-of-summer inventory levels rise from 3.4Tcf in the base case, which uses the current futures curve, to 3.9Tcf in the ‘LNG exports on the margin’ scenario. As this is above the five-year average, it is unlikely U.S. cargoes will be cancelled to the same extent as last year. However, the picture could drastically change with extreme weather, outages or tight shipping.

 

Europe: Gas market could tighten in 2021

The European gas market is showing signs of tightening in 2021, following extremely loose conditions in 2020. Underground gas storage inventories in selected European countries are currently some 20% below levels seen in January 2020. This is despite starting the respective heating seasons at similar levels. If this trend continues for the rest of 1Q, summer 2021 could see a growth in net storage injection. Two important price signals currently support the outlook of a relatively tighter market in 2021 versus 2020:

1. U.S. LNG exports destined to northwest Europe are currently well in-the-money for summer 2021 compared to summer 2020, when a wave of LNG shut-ins helped balance a vastly supplied global gas market (U.S. LNG Shut-Ins Balance Market in 3Q terminal | web).
2. TTF futures for 2021 are currently trading inside both brown (lignite) and hard-coal fuel-switching ranges, where the gas-fired power fleet faces more competition from coal generators. If these prices materialize, gas-to-power demand could drop below 2020 levels as coal displaces gas in the power sector. Note that gas-to-power demand is not only determined by the relative economics of competing fossil fuels, but also the required quantity of fossil-fuel generation.

Gas-to-power demand in five European countries is set to fall some 7% in the first nine months of 2021, according to BNEF estimates. Gas consumed in power sectors in Italy, Great Britain, Germany, France and Belgium could decline to 40 billion cubic meters, some 3Bcm below
same period last year. About a third of this decline is associated with gas-to-coal switching.

 

 

 

 

Europe: German legal shield could speed up start of commercial flows via Nord Stream 2

Construction of the undersea gas link of Russia’s Nord Stream 2 pipeline could complete in 1H 2021. Pipe laying works on the final stretch of Nord Stream 2 may resume in Danish waters on Jan. 15.

However, commercial flows might not start this year as the project faces serious political and regulatory hurdles.

• German authorities aim to shield the project from U.S. sanctions by setting a foundation, but the full extent of the implications of this arrangement remain unclear. Bloomberg News reported that the foundation would help protect the project by buying and storing goods and materials necessary to finish the project.
• Det Norske Veritas Holding AS (DNV GL), the entity set to issue a certificate of compliance upon the completion of the pipeline, intends to cease the certification process until U.S. sanctions remain in place. Finding another independent provider of verification services could prove challenging under the situation.
• Non-compliance with the EU Gas Directive is an ongoing regulatory issue. Solutions for compliance will not be so straightforward and could take several months to be implemented.

 

 

Commissioning of Nord Stream 2 is unlikely to significantly change the volumes Gazprom supplies to Europe in the medium term, but aims to provide an alternative route for Russian exports to the EU.

In the longer term, as the EU is looking for ways to decarbonize the energy sector, both natural gas and Nord Stream 2 could prove important for the supply of hydrogen. Use of hydrogen is one of the key solutions that can help EU meet its 2050 carbon neutrality aim.