April 23, 2023
Global Gas & LNG Strategy
High prices, demand falls. Low prices, demand response coming?
Our view: All pieces of the jigsaw puzzle fell into place for Europe in recent months with the continent emerging from winter in an unexpectedly strong position. With storage levels at multi-year highs for this time of year and gas prices now at fractions of what prompted a strong negative demand response, we think conditions could be turning ripe for a recovery, with some early indications of this in recent weeks. Nuances nonetheless remain in what has become a market far more inter-linked via LNG, and we explore these in this note.
Gas storage at multi-year highs. Current European gas storage appears to be at a comfortable level and if the status-quo continues on both the demand and supply-side—a sizeable if—the continent should reach the European Commission's storage target of 90% well ahead of the November 1 deadline. On our numbers, a combination of 10-15% demand destruction (vs. 2021 levels) and current supply dynamics sustaining should see the continent hitting the target in the August-September timeframe, allowing breathing space as some demand is likely to return given where spot gas prices currently sit. In recent weeks, we have seen early indications of recovering industrial demand/fuel switching and expect that to continue should prices remain subdued.
How much storage is too much storage? While cumulative EU gas storage currently sits at around 57%, inspection of country-level GIE data shows wide differences. In Iberia, Portugal and Spain currently have tanks at 96% and 87% full, respectively, while on the other end, France has storage only 30% full. We expect this to drive intra-regional gas price differentials, with Iberia likely to see lower prices than elsewhere in Europe. In recent weeks, differentials have started to widen, and we expect this to continue between Iberia and elsewhere in Europe. Recall last October-November when multiple tankers were circling the Spanish coast unable to offload.
China—the big unknown. The return of Chinese demand has been highlighted as one of the (if not the most) key moving parts in the global LNG market this year. Chinese LNG imports falling ~20% YoY last year allowed for cargoes to be re-directed elsewhere, chiefly Europe, and how Chinese buyers return to the market could impact prices and balances globally. In that vein, while imports in January-February remained below 2022 levels, March imports were up 18% YoY, almost hitting 2021 levels, with purchases in April so far also rising YoY. Continued momentum in Chinese buying could have the potential to pull Europe into a bidding war for cargoes.
Russia—what's next? Europe has made significant progress in its attempts to wean off Russian dependence with Russian pipe + LNG supply into Europe falling to about 50bcm in 1Q23 from ~145bcm in 1Q22 (both annualized), with recent headlines suggesting EU countries are looking to cut this down further by looking to block Russian LNG exports. Accounting for almost half of the Russian supply still flowing into the continent, Russian LNG imports accounted for just 13% of Europe's total imports in 1Q, with the US emerging as a key substitute supplier, although we see limited project start-ups in the short- term for the US to materially increase exports further (see here for our LNG market outlook). In our view, a move like this could disproportionately impact country-level supply-demand balances given Russian LNG into the EU has been largely flowing to 4 countries: France, Spain, Belgium, and Netherlands. As we highlighted above, French gas storage levels rank towards the bottom of the group and such a move could further squeeze balances. Furthermore, while a ban like this could just re-map flows as with some prior sanction efforts with more Russian energy flowing to countries like China, what Russia's response might be remains the unknown with a further ~25-35bcm (annualized) of piped flows at stake.