Why has TTF collapsed? Is Europe out of the woods? What matters for commodity price formations? What will matter in 2023...?
1/n
European gas prices - both TTF & NBP - have collapsed right into the start of the winter season, down from its peak of €338/MWh post Nord Stream 1 sabotage news to now €63/MWh.
Mind you though, TTF was €13/MWh 2 years prior - up still 370%.
2/n
Why is TTF lower?
Because natgas can only be consumed or stored. If storage is (95%) full & not consumed (mild weather), prices have to do the work to keep system balanced as comdties trade in present (d-s), unlike equities/bonds which discount future.
3/n EU storage in %
And Europe has not yet began to consume gas as it experiences and exceptionally mild October so far.
4/n EU gas withdrawal in (GWh/day)
So is the gas crisis over? Of course not.
Europe needs to replace even more LNG in 2023 which will get much harder.
One way to verify that is by looking at the futures curve. It prices TTF at €140/MWh come Nov 2022 and into April 2024.
5/n
For now, let's be grateful EU operaters filled storages across Europe "comme il faut" by saving 13% YTD yoy & helped by the weather gods (summer heat wave; mild winter start).
6/n 14 day weather forecast vs 30y normal
Not just EU savings and weather helped, China too!
20% lower Chinese LNG purchasing yoy matters a lot too as it dragged Asian JKM prices lower into winter months as Asia obviously competes for those same LNG spot barrels with Europe (ex Australia; ex l-t Qatar contracts).
7/n
Here is a visual how to think about the global LNG market.
In general: US, Qatar & Australia are the big 3 exporters while EU, China, Japan & South Korea are the big importers of the global LNG market.
Of course, Middle East (UAE; Oman) & Nigeria or Angola matter too.
7/n
So how can Europe balance its 2023 market?
It will have to source approx 210bcm LNG, ceteris paribus.
That is 60bcm > than 2022 (which was 60bcm > than 2021).
Weather + Groningen field spare cap of 20bcm are only factors that can change this forecast meaningfully.
8/n
China freed-up 13-15bcm in 2022 for Europe to contract away in the LNG spot market.
If they will re-engage (which we suspect) & continue LNG growth path to replace some coal use, prices (not politicans god forbid!) will have to do the work - like now - to clear market!
9/n
Europe was able to purchase 60% more LNG mainly from the US (75% incremental vol).
That is because US contracts have destination flexibility = means cargos owner were able to sell on the way to its original destination (say Japan) into Europe to make instant profit - nice!
10/
In 2021, US operators had total export capacity of 141bcm pa (13.7bcf/d) & ran it at capacity (never without risk).
US operators have incentive (lower HH prices; arbitrage) to increase such capacities. But infra expansion takes time. 2025/26 is the time for more exports.
11/n
The return of the Freeport Terminal in Q4 2022 helps but will not move the dial.
It adds 6bcm incremental supply for Europe in 2023. We are looking for 60bcm!
12/n
So far in 2022, cargo owners had a huge incentive to re-sell LNG at spot to EU - if they could.
They usually purchased LNG pre-2020 on a long-term contract paid $6-10/MMBtu. Such LNG could be sold for >$30 all year, at times at $75 in spot market.
13/n
What matters however is that Qatar does not have break-up clauses or destination flexibility.
Re-directing Qatar cargos requires (Asian) buyers to return it to Qataries at par (<$10/MMBtu). Why would they?
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.
1/x Thread
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...
2/x
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.
2/n
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).
1/n
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!
2/n
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?
Thread 1/n
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.
2/n
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).
In 2023, BYD will sell some 3 million passanger cars, of which 1.5m will likely be Battery Electric Vehicles (BEV) & the rest Plug-in Hybrids (PHEV). At least that is what we see coming from tracking monthly figures.
2/n Note: table incomplete due to poor company breakouts
BYD's Chairman shared somewhat bigger sales targets recently. He hopes to "double last year's sales to 3.6 million units".