The EU is in a gas crisis, the details of which we explained in various threads on this channel.
Ironically however, the liberalisation of the European gas markets is a huge success story. A brief history & some present day observations on gas security (#Gazprom).
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With the liberalisation of EU gas & electricity markets in 1998, in theory consumers were able to freely choose their supplier & shop for the best deal. However, most households and businesses still lacked a real choice of supplier well into 2014. Why?
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A Commission inquiry into the energy sector, published in February 2006, identified a number of "serious malfunctions" in the market as most countries maintained their local monopolies.
In 2006, the Commission's Antitrust Dept. conducted surprise inspections of European champions, incl. E.ON, Gaz de France & OMV, on suspicion they were restricting competitors' access to pipelines & storage or engaged in "market-sharing" practices.
The findings persuaded the EU executive to propose a 3rd energy liberalisation package, tabled in Sept 2007. After lengthy negotiations, the Parliament & the Czech EU Presidency struck a compromise on the legislative package on 23 March 2009.
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Fast forward to 2020: The liberalisation turned a patchwork of national gas markets into an integrated whole which allowed gas to flow freely across borders. Meanwhile, the new hub TTF lowered prices and saved €70bn when compared to the OPE pricing. A huge success!
6/n S: IEA
Today, 80% of EU gas contracts are "Gas-on-Gas" (GOG), i.e. a price discovered by a market. Back in 2005, that was true for a mere 10% while 80% of contracts were linked to crude oil, a system known as "Oil Price Indexation" (OPI or OPE).
7/n Source: IGU Survey 2020
OPE provided a relatively stable reference price that underpinned large-scale investments in upstream projects, pipelines or liquefied natural gas terminals. Such infrastructure are among the most capex-intensive. They require long-term revenue planning.
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However, gas prices did not reflect supply-demand fundamentals of the gas market itself, and buyers in the EU were unable to take advantage of periods of lower-cost supply, particularly following the US shale gas revolution which took off in 2010.
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The 3rd liberalisation package received, who would have thought, a lot of push back from #Gazprom, the de-jure Russian monopoly on gas & the largest supplier to Europe's 540bcm market (2021E). Prospects of new competiton & lower prices was a thread, not just to Gazprom.
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In 2005, profits from the sale of oil & gas exports represented 35% of total government income & 50% of the federal budget. That hasn't changed. #Russia needs EU gas revenues as much as the EU needs Russian gas from Gazprom!
Despite geopolitics, the EU included a reciprocity clause in its liberalisation package - quickly dubbed the 'Gazprom clause' - in response to fears that ownership unbundling would lead to M&A of strategic EU transmission assets by Gazprom. Elegant!
A particular irritant is a rule that prevents companies from controlling the supply & distribution in a single market. Lithuania used it & made #Gazprom a forced seller in 2014 – something Moscow likened to a Soviet-era expropriation of property.
The liberalisation hurt Gazprom's revenues for past decade due to the shift from OPE to GOG prices. However, the EU missed its security target of diversifying gas supplies. Gazprom's EU guidance is for 183bcm in 2021 or 34% (likely too high). It was 166bcm in 2006 (27%).
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And so Russia's "tradition" to use gas as a geopolitical weapon can continue. No wonder accusatory fingers have been pointed at Russia, too, in the ongoing EU gas crisis.
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One way to illustrate the "unusal" today is by isolating Germany's gas storage cycles over some years. #Gazprom operates 25% of German storage. It's ridiculous (especially when certain Twitter experts explain Gazprom's EU storage business was unprofitable - in 2021!).
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Gazprom's EU storage remains seasonally-adjusted low despite VVP's promises for more (watch what they do, not what they say). It may well have supplied its contracted gas, but has not replenished 10bcm EU storage (= Groningen; 5.5% of 183bcm 2021 EU export guidance).
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If Gazprom couldn’t pump enough gas to fill both its domestic & overseas facilities (Russia had an unusually long winter 2019/20), EU leaders need to worry that Russia’s lack of production capacity has to be added to its long list of supply worries (UK, NL, ..).
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EU politicians were reluctant to celebrate their success. Smart. The liberalisation failed to deliver one objective – supply diversification. The EU dependents on Russian gas while its latest green policy proposal worsens that..!
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).