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Analys

Natural gas – A Glimpse into Supply, Demand, and Prices

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SEB - analysbrev på råvaror
Ole R. Hvalbye
Ole R. Hvalbye, Analyst Commodities, SEB

Supply: Recent weather patterns across Europe have been milder than usual, leading to a delayed onset of the heating season. The weather forecast for the next two weeks predicts a continuation of this trend. As a result, EU TTF spot prices have decreased, leading to a reduced volume of LNG imports to Europe in September and early October. Current imports stand at about 3.3 TWh/day, down from 4.0 TWh/day at this time last year, and significantly lower than the 6.0 TWh/day at the beginning of summer 2023.

Total flow of natural gas to Europe, GWh

Although peak maintenance on the Norwegian Continental Shelf (NCS) concluded in mid-September, it is scheduled to continue for another month. Despite this, Norwegian natural gas exports to Europe are encouraging, currently at 2.6 TWh/day, though still below the historical average of 3.4 TWh/day. Meanwhile, Russian supplies have increased marginally from 0.6 TWh/day in mid-summer to 0.85 TWh/day currently, yet they remain 2.65 TWh/day below the historical average. Overall, Europe’s current supply is roughly 8.65 TWh/day, clearly lower than the historical average of 11 TWh/day for this period.

Demand: Last year witnessed a significant decrease in European natural gas demand, which has persisted longer than anticipated. Present consumption rates are slightly lower than last year at 7.5 TWh/day and are 2.5 TWh/day below the historical norm. Current consumption patterns resemble those typically seen in August—a month characterized by European holidays and peak maintenance on the continent’s natural gas infrastructure. The prevailing mild weather is likely to further reduce consumption in the coming weeks. Moreover, industrial gas consumption among the EU’s major consumers (DE, FR, IT, BE, UK, & NL) has remained consistent with October 2022 levels, at 1.9 TWh/day, which is 0.6 TWh/day below historical averages.

2022-2023 consumption gap to average (GWh/day)

Inventories: EU natural gas storage levels are nearing capacity, with current levels at 96.3%, 9.5% higher than the five-year average. This excess has contributed to the decline in spot prices. With storage nearly full, some stored volumes must be sold at discounted rates to accommodate incoming LNG shipments. However, longer-term prices for the upcoming months and winter 2023/24 remain relatively stable. Although concerns about potential shortages for the upcoming winter are lessening, end-of-April 2023 inventory levels will influence the market for the following seasons.

EU natural gas storage levels

Inventory Outlook: Given the ongoing demand reduction, inventories are expected to remain robust in the short term. However, as the end of the year approaches, projections indicate a convergence towards a more ”normal” inventory level. This means that by year-end, inventories will be 36 TWh above typical levels, a significant reduction from the 259 TWh surplus in early April 2023. Presently, the surplus stands at 116.8 TWh. The trend suggests that inventory levels will approach historical norms, resulting in a tighter EU natural gas market as peak winter approaches.

Inventory Outlook for natural gas in europe

Price Dynamics: Europe’s mild start to the heating season has proven beneficial, especially during a time of peak maintenance at the NCS and potential risks of decreased global LNG supplies (Australian LNG). The high current inventory levels have significantly minimized the risk of natural gas shortages for the upcoming winter. However, as the heating season progresses, the EU inventory drawdown will be significant.

Global naturgal gas prices

Current price dynamics reveal that the EU TTF forwards (M+1 and winter 2023/24) have declined “too far” compared to the Japanese LNG price. LNG is, and will continue to be, the marginal supplier of natural gas to Europe.

In 2022, the EU witnessed unprecedented levels of LNG imports. To realize this, the EU natural gas price consistently traded at a premium — averaging EUR 15.6/MWh over the front-month Japanese LNG price throughout the year. By the second half of 2022, this premium escalated to an average of EUR 30/MWh. However, the tables have turned: currently, the EU price is at a discount of EUR 8/MWh to the Japanese LNG price for November (M+1) and EUR 5.5/MWh for Q124.

We foresee this trend as short-lived. We believe that, as winter approaches, the EU TTF natural gas price will not only match but potentially exceed the Japanese LNG price by a premium of EUR 5-10/MWh. In our view, the current EU TTF natural gas forwards are undervalued relative to the Japanese LNG price and will likely see a correction, ensuring the EU continues its robust LNG imports. Standing by our early September Gas price projection, we anticipate the average TTF spot price for Q4 2023 to be around EUR 55/MWh and the aggregate for 2023 to settle at EUR 45.5/MWh.

Analys

More weakness and lower price levels ahead, but the world won’t drown in oil in 2026

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SEB - analysbrev på råvaror

Some rebound but not much. Brent crude rebounded 1.5% yesterday to $65.47/b. This morning it is inching 0.2% up to $65.6/b. The lowest close last week was on Thursday at $64.11/b.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

The curve structure is almost as week as it was before the weekend. The rebound we now have gotten post the message from OPEC+ over the weekend is to a large degree a rebound along the curve rather than much strengthening at the front-end of the curve. That part of the curve structure is almost as weak as it was last Thursday.

We are still on a weakening path. The message from OPEC+ over the weekend was we are still on a weakening path with rising supply from the group. It is just not as rapidly weakening as was feared ahead of the weekend when a quota hike of 500 kb/d/mth for November was discussed.

The Brent curve is on its way to full contango with Brent dipping into the $50ies/b. Thus the ongoing weakening we have had in the crude curve since the start of the year, and especially since early June, will continue until the Brent crude oil forward curve is in full contango along with visibly rising US and OECD oil inventories. The front-month Brent contract will then flip down towards the $60/b-line and below into the $50ies/b.

At what point will OPEC+ turn to cuts? The big question then becomes: When will OPEC+ turn around to make some cuts? At what (price) point will they choose to stabilize the market? Because for sure they will. Higher oil inventories, some more shedding of drilling rigs in US shale and Brent into the 50ies somewhere is probably where the group will step in.

There is nothing we have seen from the group so far which indicates that they will close their eyes, let the world drown in oil and the oil price crash to $40/b or below.

The message from OPEC+ is also about balance and stability. The world won’t drown in oil in 2026. The message from the group as far as we manage to interpret it is twofold: 1) Taking back market share which requires a lower price for non-OPEC+ to back off a bit, and 2) Oil market stability and balance. It is not just about 1. Thus fretting about how we are all going to drown in oil in 2026 is totally off the mark by just focusing on point 1.

When to buy cal 2026? Before Christmas when Brent hits $55/b and before OPEC+ holds its last meeting of the year which is likely to be in early December.

Brent crude oil prices have rebounded a bit along the forward curve. Not much strengthening in the structure of the curve. The front-end backwardation is not much stronger today than on its weakest level so far this year which was on Thursday last week.

Brent crude oil prices have rebounded a bit along the forward curve.
Source: Bloomberg

The front-end backwardation fell to its weakest level so far this year on Thursday last week. A slight pickup yesterday and today, but still very close to the weakest year to date. More oil from OPEC+ in the coming months and softer demand and rising inventories. We are heading for yet softer levels.

The front-end backwardation fell to its weakest level so far this year on Thursday last week.
Source: SEB calculations and graph. Bloomberg data
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Analys

A sharp weakening at the core of the oil market: The Dubai curve

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SEB - analysbrev på råvaror

Down to the lowest since early May. Brent crude has fallen sharply the latest four days. It closed at USD 64.11/b yesterday which is the lowest since early May. It is staging a 1.3% rebound this morning along with gains in both equities and industrial metals with an added touch of support from a softer USD on top.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

What stands out the most to us this week is the collapse in the Dubai one to three months time-spread.

Dubai is medium sour crude. OPEC+ is in general medium sour crude production. Asian refineries are predominantly designed to process medium sour crude. So Dubai is the real measure of the balance between OPEC+ holding back or not versus Asian oil demand for consumption and stock building.

A sharp weakening of the front-end of the Dubai curve. The front-end of the Dubai crude curve has been holding out very solidly throughout this summer while the front-end of the Brent and WTI curves have been steadily softening. But the strength in the Dubai curve in our view was carrying the crude oil market in general. A source of strength in the crude oil market. The core of the strength.

The now finally sharp decline of the front-end of the Dubai crude curve is thus a strong shift. Weakness in the Dubai crude marker is weakness in the core of the oil market. The core which has helped to hold the oil market elevated.

Facts supports the weakening. Add in facts of Iraq lifting production from Kurdistan through Turkey. Saudi Arabia lifting production to 10 mb/d in September (normal production level) and lifting exports as well as domestic demand for oil for power for air con is fading along with summer heat. Add also in counter seasonal rise in US crude and product stocks last week. US oil stocks usually decline by 1.3 mb/week this time of year. Last week they instead rose 6.4 mb/week (+7.2 mb if including SPR). Total US commercial oil stocks are now only 2.1 mb below the 2015-19 seasonal average. US oil stocks normally decline from now to Christmas. If they instead continue to rise, then it will be strongly counter seasonal rise and will create a very strong bearish pressure on oil prices.

Will OPEC+ lift its voluntary quotas by zero, 137 kb/d, 500 kb/d or 1.5 mb/d? On Sunday of course OPEC+ will decide on how much to unwind of the remaining 1.5 mb/d of voluntary quotas for November. Will it be 137 kb/d yet again as for October? Will it be 500 kb/d as was talked about earlier this week? Or will it be a full unwind in one go of 1.5 mb/d? We think most likely now it will be at least 500 kb/d and possibly a full unwind. We discussed this in a not earlier this week: ”500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d”

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily. That core strength helped to keep flat crude oil prices elevated close to the 70-line. Now also the Dubai curve has given in.

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily.
Source: SEB calculations and graph, Bloomberg data

Brent crude oil forward curves

Brent crude oil forward curves
Source: Bloomberg

Total US commercial stocks now close to normal. Counter seasonal rise last week. Rest of year?

Total US commercial stocks now close to normal.
Source: SEB calculations and graph, Bloomberg data

Total US crude and product stocks on a steady trend higher.

Total US crude and product stocks on a steady trend higher.
Source: SEB calculations and graph, Bloomberg data
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Analys

OPEC+ will likely unwind 500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d in one go could be in the cards

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SEB - analysbrev på råvaror

Down to mid-60ies as Iraq lifts production while Saudi may be tired of voluntary cut frugality. The Brent December contract dropped 1.6% yesterday to USD 66.03/b. This morning it is down another 0.3% to USD 65.8/b. The drop in the price came on the back of the combined news that Iraq has resumed 190 kb/d of production in Kurdistan with exports through Turkey while OPEC+ delegates send signals that the group will unwind the remaining 1.65 mb/d (less the 137 kb/d in October) of voluntary cuts at a pace of 500 kb/d per month pace.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Signals of accelerated unwind and Iraqi increase may be connected. Russia, Kazakhstan and Iraq were main offenders versus the voluntary quotas they had agreed to follow. Russia had a production ’debt’ (cumulative overproduction versus quota) of close to 90 mb in March this year while Kazakhstan had a ’debt’ of about 60 mb and the same for Iraq. This apparently made Saudi Arabia angry this spring. Why should Saudi Arabia hold back if the other voluntary cutters were just freeriding? Thus the sudden rapid unwinding of voluntary cuts. That is at least one angle of explanations for the accelerated unwinding.

If the offenders with production debts then refrained from lifting production as the voluntary cuts were rapidly unwinded, then they could ’pay back’ their ’debts’ as they would under-produce versus the new and steadily higher quotas.

Forget about Kazakhstan. Its production was just too far above the quotas with no hope that the country would hold back production due to cross-ownership of oil assets by international oil companies. But Russia and Iraq should be able to do it.

Iraqi cumulative overproduction versus quotas could reach 85-90 mb in October. Iraq has however steadily continued to overproduce by 3-5 mb per month. In July its new and gradually higher quota came close to equal with a cumulative overproduction of only 0.6 mb that month. In August again however its production had an overshoot of 100 kb/d or 3.1 mb for the month. Its cumulative production debt had then risen to close to 80 mb. We don’t know for September yet. But looking at October we now know that its production will likely average close to 4.5 mb/d due to the revival of 190 kb/d of production in Kurdistan. Its quota however will only be 4.24 mb/d. Its overproduction in October will thus likely be around 250 kb/d above its quota  with its production debt rising another 7-8 mb to a total of close to 90 mb.

Again, why should Saudi Arabia be frugal while Iraq is freeriding. Better to get rid of the voluntary quotas as quickly as possible and then start all over with clean sheets.

Unwinding the remaining 1.513 mb/d in one go in October? If OPEC+ unwinds the remaining 1.513 mb/d of voluntary cuts in one big go in October, then Iraq’s quota will be around 4.4 mb/d for October versus its likely production of close to 4.5 mb/d for the coming month..

OPEC+ should thus unwind the remaining 1.513 mb/d (1.65 – 0.137 mb/d) in one go for October in order for the quota of Iraq to be able to keep track with Iraq’s actual production increase.

October 5 will show how it plays out. But a quota unwind of at least 500 kb/d for Oct seems likely. An overall increase of at least 500 kb/d in the voluntary quota for October looks likely. But it could be the whole 1.513 mb/d in one go. If the increase in the quota is ’only’ 500 kb/d then Iraqi cumulative production will still rise by 5.7 mb to a total of 85 mb in October.

Iraqi production debt versus quotas will likely rise by 5.7 mb in October if OPEC+ only lifts the overall quota by 500 kb/d in October. Here assuming historical production debt did not rise in September. That Iraq lifts its production by 190 kb/d in October to 4.47 mb/d (August level + 190 kb/d) and that OPEC+ unwinds 500 kb/d of the remining quotas in October when they decide on this on 5 October.

Iraqi production debt versus quotas
Source: SEB calculations, assumptions and graph, Bloomberg actual production data to August
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