A short thread in charts on why we are here & where the EU gas crisis is aheading next.
Summary: EU gas security is a prayer, not a policy!
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As of today, EU gas storage tanks are 72% filled. This is WELL below its 5-year averages.
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Expressed in Terra Watt Hours (TWh), the EU has 809 TWh of storage as at 21 November 2021.
For perspective: In the winter 2017/18, the EU consumed 770 TWh from 1 Nov 2017 - 31 March 2018.
Gas storage couldn't go that low bc pipeline systems needs to stay under pressure.
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There are three MAIN reasons why EU storage tanks are well below their averages at the start of the winter season. There are smaller reasons which we disregard.
1. Gazprom did not fill its EU storage tanks in Germany, Austria and the Netherlands.
The 2nd reason is that EU produced 12% less gas when compared to 2019 (pre-Covid) due to NL's Groningen field reduction (quota production due to earthquates) & natural field declines in UK. These declines are structural, not seasonal. Only Norway re-invests in production.
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The 3rd reason: 14% less LNG imports when compared seasonally. Is that structural? It depends! Fact is that Asia will continue to try to out-bid the EU for EVERY SINGLE marginal LNG tanker as its natural gas demand needs to replace coal. Maybe @OKalleklev wants to comment?
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So let us now look at how the EU is withdrawing its gas from a seasonal perspective.
Answer: We are withdrawing gas quickly from a 5-year average perspective.
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Is that overcompensated by over-proportational injection rates for the time of the season. Answer: not at all...!
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Who is withdrawing gas faster than usual. France, the 2nd largest gas consumer, certainly is.
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But Italy is also quick to withdraw seasonally.
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Germany is below average for now. But winter has now arrived in the south. So this may well change rather quickly.
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Austria, the gas hub for Central & Eastern Europe is also increasing withdrawals at a fast clip now.
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So, going forward, the only thing that matters for EU gas is the weather forecast. If the weather is colder than 2017/18, TTF will go literally to the moon from here bc demand must be destructed.
What is the forecast right now? For Central Europe, as of today the forecast below
North West Europe? Slightly below average temps (red line vs green line).
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The Nordics? About average cold, with an above average mid-December.
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Mediterranean Europe (Italy, Spain, et al)...below average cold for next 35 days.
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In sum, withdrawals are ahead while weather indicates avg cold. Yet, TTF will not calm due storage % & price convergence with Asia (marginal LNG gas barrel). If weather forecast go below avg, TTF will go higher.
Context: EU = 540bcm market; US = 950bcm; Asia = 700bcm going to 1200bcm by 2040.
Point is: Of the big 3, ONLY US has excess gas. Both EU & Asia depend on pipeline & LNG imports from Russia, Qatar, Africa & Australia. Gas crisis = a structural deficit crisis!
So now that u understand that the EU/Asian gas crisis has many structural elements and is not going away, potentially ever, here is one way to express the view as an educated investor…
By the by, the looming Russian-Ukrainian conflict does not help to calm TTF due to existing pipeline system - ex Nord Stream (Baltic Sea) & Yamal (Belarus) - relying on Ukraine as transit hub to bring natgas from Russia to EU.
Let me share some real time data on the EU natgas market that are hard to get.
European gas consumption for 28 countries matches last's years to the cubic meter (Oct 2022 - Oct 2023 = Year 2022).
However, consumption remains 17% below 2019/20 season.
Is there a supply issue? Rubbish. The global LNG market is oversupplied from every corner; EU storages will be filled by end of Aug where we sit. We have too much gas.
#TTF 1/4 (in mcm/day and YTD)
Three factors matter why there is less consumption vs 2019/20 season:
1) Milder weather: 70% of total consumption is temperature related. Temperatures are milder, thus Europe consumes 14% less vs 2019/20.
Is that permenant? It sure looks like a trend where I sit. But climate scientists can answer that best.
Households Consumption; 2/4
2) Less power generation: Europe replaces more and more natgas in the grid with solar & wind and in the case of France with better capacity utilisation of its nuclear fleet. That adds up...!
India likes a "GOOD" deal - also in crude oil - and is about to teach Russia a lesson what that means.
Spoiler 1: it's not a pretty one!
Spoiler 2: China & Turkey will learn quickly..!
Let's look at the Indian-Russo crude oil bromance.
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Before the invasion in Feb 2022, Russia exported some 2.8mbpd (55%) of its 5.5mbpd crude to Europe by way of pipeline (Druzhba) & sea transportation (seaborne).
But not just crude oil...
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Russia also sold products such as diesel or jet to Europe for a total of 1.4mbpd in petroleum product exports.
In other worlds, G7 sanctioned as introduced in Dec 2022 required 4.2+mbpd of crude & products to be re-shuffeled in globally. Big numbers!
For now, Red Sea disruptions due to Houthi attacking commercial vessels randomly remains a ton-mile story, not a crude oil story.
Within different shipping segments the picture of diverting cargo around the Suez Canal remains a Container Vessel story, to a less extent also a Product Tanker & Crude Oil tanker story.
Container Vessels owners have been the most consequent in diverting cargo.
Since Nov, the number of container vessels crossing the Suez Canal has collapsed by 80% in both directions.
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Crude Oil tankers from the Middle East (Saudi Arabia; UAE; Iraq; Kuwait; Qatar or Oman) to Europe are also lower but our high frequency data does not yet show a similar collapse.
It also nicely illustrates how changing Russian crude flows (Urals diverted to India & China and away from Europe) have increased traffic through the Suez Canal - good for Egypt as Russian dark fleet vessels will or cannot seek an alternative route to ship oil from the Baltics to India.
Brazil is is an interesting microcosm to study in the oil industry.
It's a large, growing consumer of petroleum products. It's the 8th largest producer of crude oil in Dec 2023 as well as a large producer & consumer of biofuels.
Most importantly, it's energy agency reports the data in detail & timely (unlike most countries globally).
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Brazil's resource wealth (mainly offshore) is well documented but it struggled for years to follow through.
Finally, it does with an exit rate of 3.9mbpd of oil production in 2023. Only the US, SA, RUS, CAD, IRQ, CN & IRN (incl condi; in this order) produced more that month. That's 50% growth since Jan 2018!
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Better still, most such production growth reaches the international market. In Dec 2023, Brazil exported 1.7mbpd of crude oil - an ATH.
Remember, in oil net exports is the key number to measure.
Shall we look at the European NatGas market together?
Will Europe have to freeze this winter, after much mild weather luck last winter?
Will TTF drag coal prices up as last winter?
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Our rolling forecast upfront for those of you with a little ADD:
Best-estimate today, Europe will exit the winter 23/24 in March at or around 40% storage levels (red line) which suggests TTF doesn't have to spike, ceteris paribus. Is it a bear? Neither.
Let me explain.
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Natgas has unique characteristics for a commodity:
Supply is inelastic while demand is highly ELASTIC: Colder temps >> demand goes up exponentially & vice versa.
Not all demand is equal but heating buildings (HH & retail demand) is 65-70% of winter demand (Oct-Mar).