Is Europe Facing Another Energy Price Crisis? The Gas Outlook | Erisa Pasko, Energy Aspects

I'll follow Joanna's example and give a brief introduction. I'm Erisa, I lead the European Gas team at Energy Aspects, a consultancy and data provider for different energy commodities including oil, gas, power markets, emissions and biofuels. Today my presentation will be mostly focused on the gas market and its impact over the, well, this winter. So I'll start with a bit of a bit of a slightly more positive news. The situation for Europe is maybe looking slightly less concerning than it was a few months ago, especially after the US-Iran MOU broke down in July. We now expect European storage to be around 80 BCM or 74% full by the end of October. That's of course very low in comparison to historical standards, but it's not as concerning as some of the scenarios we were running back in the summer. In terms of end of season inventories, those are looking at 24 BCM or 22%, still very low in comparison to historical standards, but it's still adequate in meeting any late winter or early spring cold snaps. Putting it into a bit more context, if we have, and also looking at the deliverability of that gas in storage, if we have a 5% colder than average winter, the shortfall would be only about 2-3 LNG cargoes. If it's, however, on the extreme end of things, if it's 10% colder than average, that amounts to about 5.6 BCM of shortfall. So roughly 58 cargoes that Europe will need. Now the biggest uncertainty is of course the Qatar supply. Here we assume that disruptions are going to be, continue to be heavily disrupted through the end of the year. That's more of a modelling assumptions that we use, but that means that there's going to be a following, followed by a gradual recovery from January, with Qatar production only reaching nameplate capacity by the end of June. And that's only at the undamaged trains after it lost to trains in the end of March. We don't really think that the production is the main constraint here. Through Keros, which is a recent acquisition that we've done, we've been looking at the thermal imagery, and we can see that Qatar has been cycling through its trains, which will give it a very, it will make it very easy for Qatar to bring back production within a matter of weeks. But that will require very safe shipping through the Strait of Hormuz. So we think shipping is the main constraint for Qatar. There has been an increase in transit by the Strait of Hormuz through so-called dark transit, so IES responders being switched off, especially in the last two, three weeks. However, that situation remains quite fragile. If it's really, there's a lot of uncertainty if Qatar can really maintain the current pace. There was an attack on a Qatari tanker just on the 5th of October. The pace of transit hasn't really slowed down since. But given Iranian threats that it will continue to attack vessels, especially if they're continuing to travel in a dark state, that could mean there's going to be even more attacks. And conversations with ship owners just state that they're not, they're very reluctant to really send their vessels through the strait. So the balance of risk here is a bit on the both sides. If Qatar really sustain the current pace, then the supply will loosen global balances with more LNG going to Asia and a lower pull on Atlantic cargoes into Asia. However, if it deteriorates and they can't maintain the dark transits, that will further tighten the LNG market, with Asia having to pull more cargoes from Europe. And touching on to Asia, we expect a lot of demand destruction there, especially in Q4 when LNG supply remains disrupted. The demand response in Asia has so far not really been uniform. China has seen a lot of demand destruction, especially in industry, but also in its transport sector, which is the most price sensitive sector in China. It's also been displacing a lot of gas -fired generation through coal generation. And we've seen a similar story in Japan and South Korea, which changed their policy as a result of the Iran crisis and brought back more coal-fired capacity into the market. In terms of Southeast Asia and South Asia, maybe that's been the most surprising so far, this conflict. There's been a lot of government-backed purchases of LNG imports in India and in Bangladesh. For India, that's mostly in the fertiliser sector, while Bangladesh, which in the previous crisis had to pull out of the market, this time through government-backed backing, it has maintained purchases even at these elevated prices. However, in a lot of industrial sectors and in some countries, for example Pakistan, LNG imports are not able to be sustained at these prices. In terms of supply, there is obviously a lot of new additions coming to the markets, most of those are coming from the US, but those really fall short of really replacing all the volumes that we have lost from Qatar. For this winter, new additions outside of the Middle East only amount to 5.6 million tons. But more crucially, there are no new projects set to commission this winter. The next project that is entering the market is Qatar's North East in Q2, and that's really an optimistic scenario. Anything else is coming just from Q3 and onwards. Now, going back into the European side of things, there's going to be a lot of demand losses for gas demand in Europe. A lot of that will be just driven by the power sectors and also the industrial sector. For industry, the high TTF prices are putting a lot of pressure on industry. We've only seen some demand destruction materialising just in Q3, with the demand being quite resilient before. But at this high prices, we have seen before, there's some sensitivity, especially when prices cross 60, 70 euros. However, there's not going to be the same demand response we had in 2022, 23. If anything, maybe the demand destruction that we're assuming might be a bit too pessimistic, because a lot of the price sensitive industrial companies, they had to shut down their production after 2021. We've tracked about 63 closures since 2021. Most of them have already relocated to the US and China. So maybe that demand response will not be as much. And at the same time, the residual industrial demand in Europe is quite sticky, especially with sectors like, for example, cement, where you need prices in the triple digits to really see demand destruction. Then on the power side of things, we expect most of the decline to be in the power sector, with coal generation being maximised this winter. Gas fell out of the merit order when prices crossed 50 euros. So that's been an obvious thing since months now. But I would say that most of the gas generation decline will be concentrated in Q1. And that's because the power balances for Q4 are looking a bit tight. And the main driver behind that is the French nuclear maintenance. So we have French nuclear maintenance falling by 10.6 TWh in Q4, and only starting to recover from Q1. The other driver is obviously hydro generation. Hydro stocks are near historical lows after the drought that we saw this summer. And we don't expect hydro generation to recover until well into late winter. And there's also the fact that power loads, so electricity demand is increasing in Europe, mainly through the new demand drivers, heat pumps, EVs, and battery storage, and data centres. And that's especially the case for the Benelux region. So when you consider how tight the power balance is, or for at least Q4, any colder snap or underperformance or renewable would go straight into increased gas-fired generation and to higher storage withdrawals. So, maybe one... This is maybe one of the most bearish scenarios I've been looking at. Obviously, there's... Normally there's not much of a correlation between El Nino and European climate. However, with this time being a strong El Nino, there is some correlation. It's not VIA given. Maybe it's a 50% chance that there is an impact. But it does skew the risk towards a much, much looser European gas balance. Some of the scenarios we've run would cut European gas demand by 8 to 12 BCM over the course of the winter. Within the scenarios, we think the lower range of that is more realistic. There is... It's quite certain that if it does happen, if there is an impact, autumn will be quite mild, which has also been the trend for the last few years. But there is a 55% chance that Q1 is actually cold. It could either be a cold Q1 or a late winter cold snap. And we've run some price scenarios based on this. In all scenarios, Q4 prices would need to remain elevated, which tends to be also the normal way that gas is traded, where you still have to keep some risk over Q4 given the uncertainty of Q1. That's especially the case this time around when we don't really know when Qatar energy supply will recover. But in Q1, if it does become milder, then prices could fall to 40 euros by the end of winter. If, however, it turns colder, then prices would have to shoot back up to 70 euros or above over January. And the same would be if it happens over late winter. On the supply side of things, given how constrained the LNG market is, and even when accounting of demand destruction we see in Asia, European LNG supply will still fall over the winter. We expect it to fall by about 4.4 million tons to about 40 million tons over the course of winter, and only starting to recover from May 2027. The risk here is skewed to the upside if Qatari disruptions continue. But if it becomes much milder in Asia, which is more of a probability, then there's going to be more supply coming to Europe. There's not much flexibility in other sources of supply for Europe. We have Norwegian pipeline supply increasing by 1 BCM. That's just through some new additions from the troll field. And then through some seasonal profiling with more production coming in winter and less through summer. In terms of other supply sources, there's really not much flexibility there. So if it comes to a worst-case scenario that the LNG market tightens, it would just result in much, much higher prices and a lot more demand destruction. And lastly, I also want to touch a bit on Ukraine, which is also a big source of uncertainty this winter. It has recently switched back to becoming a net exporter after being a net importer for the last winter after it lost some production from Russian attacks. Now the Ukrainian balance has loosened quite a bit on the gas side of things. They have exceeded their storage targets, but also their industrial demand is very, very weak just because of continued Russian attacks. So they haven't really been able to maintain industrial activity. They can't really export through the export given the Russian attacks, which meant that there was a very steep discount between Ukrainian prices and European gas prices. So some of these have been coming from Naftogas through a customs warehouse mechanism, but some are likely also to come from their domestic gas. Previously, this has been banned, but recently they relaxed the ban to allow private producers in Ukraine to export to Europe. Still, the export volumes we're assuming for this winter are only marginal at 0.7 BCM, where they have capacity to export much more than this. But we think that Ukraine will be still a bit more strategic in preserving its storage given the very high risk that Russia will continue to attack. And they have lost a lot of air defense capabilities. So they do have the incentive to just preserve storage. So just summarizing a bit my presentation, Europe is not... Maybe it will withstand the winter, even though it has very low storage. The supply is looking quite tight, and there's going to be a lot of Asian demand. But yeah, the main things to look at is how quickly that Qatar LNG supply recovers, if there is any recovery to Asian demand from here, and how weather will really affect gas and renewables through Q1. If it does become... If it does go in Europe's favor, then prices will crash very quickly. However, on the other side of things, there is not much resistance to the upside for the TTF prices, which leaves only very little price-sensitive industrial gas demand to really minimize. Thank you. Thank you. Excellent. Excellent. So, we can be reassured. There's no... We can sort of rest easy. We have winter gas storage, no problem. For a little while. For a little while, at least, anyway. But, Arisa, thank you very much. An excellent overview of what's happening in the gas market. Just a couple of questions from me before we open it to the floor. Where... Where... I mean, we've seen the front month TTF contract is, you know, never been this high. Certainly not this year. It's around 80, 85, 86 euros per megawatt hour. What are your forecasts for the next months and in the winter? Can it reach 100? If you had asked me a few weeks ago, I would have said yes. Given the current trajectory for storage, I think it looks a bit unlikely for now. It would take a very extreme scenario of a very cold winter and even more disruptions to LNG to really get there. Okay. So we're... But it still keeps climbing. Yeah. Yeah. I mean, but I would say that fundamentals do not really justify the current price increases that we're seeing. That's really been driven by the geopolitical uncertainty, given Iran has really stepped up its attacks. Yeah. So if it does continue this way, maybe it will continue. But at the same time, just looking at the positioning side of things talking to tracers, everything is already looking quite maximum log. So it's a point where maybe we're going to see a lot of short, a lot of profit taking now because nothing is really happening to really justify the price increases. At that level? Yeah. At 18 plus? Yeah. This could change when we go further into a winter and it's looking still quite uncertain. There's no progress to a deal and it's not that mild. Okay. So then we could maybe see another jump in price series. Excellent. I... Obviously quite central to your forecast must be what's happening in Hormuz, the Strait of Hormuz. Now, you know, I know you're not... You don't have a crystal ball and you don't know what's happening and you're not a geopolitical analyst, but, you know, do you, in your analysis, expect that the strait to open this year, early next year, or to remain closed throughout 2027? We have heavy disruptions until the end of the year. That will mean just more down-track transits going through but not really a full reopening. We only expect some reopening from early 2027. And what basis is that? Is that...? Yeah, I mean, we had to take many different scenarios, right? You have a shorter scenario, a base case, and then, obviously, there's the worst case where it extends further into 2027. There is, obviously, still a lot of diplomatic talks. They're not really leading anywhere, but there's still a lot of time between now and the end of the year that there could be some progress. If we go into November and December and nothing is really materialising, that, yeah, that changes things. Absolutely. There is a bit of a merry-go-round, isn't there, with Trump, and he's saying, I'm going to blow Iran to smithereens and into the Stone Age. Prices rise massively. Then he says, oh, there's nearly a deal, and then prices fall. I mean, we've been seeing that pattern for a while, and maybe that will continue. Any questions from the floor? Now, I think, in the interest of time, Marisa, fascinating. I'm sure you're around today, so maybe they can ask you questions. So, once again, please join me giving her a warm round of applause. Thank you. Thank you. And here's a small present for us, Marisa. Thank you very much. Thank you.