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


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.

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.

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.

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.

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.

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
June OPEC+ quota: Another triple increase or sticking to plan with +137 kb/d increase?

Rebounding from the sub-60-line for a second time. Following a low of USD 59.3/b, the Brent July contract rebounded and closed up 1.8% at USD 62.13/b. This was the second test of the 60-line with the previous on 9 April when it traded to a low of USD 58.4/b. But yet again it defied a close below the 60-line. US ISM Manufacturing fell to 48.7 in April from 49 in March. It was still better than the feared 47.9 consensus. Other oil supportive elements for oil yesterday were signs that there are movements towards tariff negotiations between the US and China, US crude oil production in February was down 279 kb/d versus December and that production by OPEC+ was down 200 kb/d in April rather than up as expected by the market and planned by the group.

All eyes on OPEC+ when they meet on Monday 5 May. What will they decide to do in June? Production declined by 200 kb/d in April (to 27.24 mb/d) rather than rising as the group had signaled and the market had expected. Half of it was Venezuela where Chevron reduced activity due to US sanctions. Report by Bloomberg here. Saudi Arabia added only 20 kb/d in April. The plan is for the group to lift production by 411 kb/d in May which is close to 3 times the monthly planned increases. But the actual increase will be much smaller if the previous quota offenders, Kazakhstan, Iraq and UAE restrain their production to compensate for previous offences.
The limited production increase from Saudi Arabia is confusing as it gives a flavor that the country deliberately aimed to support the price rather than to revive the planned supply. Recent statements from Saudi officials that the country is ready and able to sustain lower prices for an extended period instead is a message that reviving supply has priority versus the price.
OPEC+ will meet on Monday 5 May to decide what to do with production in June. The general expectation is that the group will lift quotas according to plans with 137 kb/d. But recent developments add a lot of uncertainty to what they will decide. Another triple quota increase as in May or none at all. Most likely they will stick to the original plan and decide lift by 137 kb/d in June.
US production surprised on the downside in February. Are prices starting to bite? US crude oil production fell sharply in January, but that is often quite normal due to winter hampering production. What was more surprising was that production only revived by 29 kb/d from January to February. Weekly data which are much more unreliable and approximate have indicated that production rebounded to 13.44 mb/d after the dip in January. The official February production of 13.159 mb/d is only 165 kb/d higher than the previous peak from November/December 2019. The US oil drilling rig count has however not change much since July last year and has been steady around 480 rigs in operation. Our bet is that the weaker than expected US production in February is mostly linked to weather and that it will converge to the weekly data in March and April.
Where is the new US shale oil price pain point? At USD 50/b or USD 65/b? The WTI price is now at USD 59.2/b and the average 13 to 24 mth forward WTI price has averaged USD 61.1/b over the past 30 days. The US oil industry has said that the average cost break even in US shale oil has increased from previous USD 50/b to now USD 65/b with that there is no free cashflow today for reinvestments if the WTI oil price is USD 50/b. Estimates from BNEF are however that the cost-break-even for US shale oil is from USD 40/b to US 60/b with a volume weighted average of around USD 50/b. The proof will be in the pudding. I.e. we will just have to wait and see where the new US shale oil ”price pain point” really is. At what price will we start to see US shale oil rig count starting to decline. We have not seen any decline yet. But if the WTI price stays sub-60, we should start to see a decline in the US rig count.
US crude oil production. Monthly and weekly production in kb/d.

Analys
Unusual strong bearish market conviction but OPEC+ market strategy is always a wildcard

Brent crude falls with strong conviction that trade war will hurt demand for oil. Brent crude sold off 2.4% yesterday to USD 64.25/b along with rising concerns that the US trade war with China will soon start to visibly hurt oil demand or that it has already started to happen. Tariffs between the two are currently at 145% and 125% in the US and China respectively which implies a sharp decline in trade between the two if at all. This morning Brent crude (June contract) is trading down another 1.2% to USD 63.3/b. The June contract is rolling off today and a big question is how that will leave the shape of the Brent crude forward curve. Will the front-end backwardation in the curve evaporate further or will the July contract, now at USD 62.35/b, move up to where the June contract is today?

The unusual ”weird smile” of Brent forward curve implies unusual strong bearish conviction amid current prompt tightness. the The Brent crude oil forward curve has displayed a very unusual shape lately with front-end backwardation combined with deferred contango. Market pricing tightness today but weakness tomorrow. We have commented on this several times lately and Morgan Stanly highlighted how unusual historically this shape is. The reason why it is unusual is probably because markets in general have a hard time pricing a future which is very different from the present. Bearishness in the oil market when it is shifting from tight to soft balance usually comes creeping in at the front-end of the curve. A slight contango at the front-end in combination with an overall backwardated curve. Then this slight contango widens and in the end the whole curve flips to full contango. The current shape of the forward curve implies a very, very strong conviction by the market that softness and surplus is coming. A conviction so strong that it overrules the present tightness. This conviction flows from the fundamental understanding that ongoing trade war is bad for the global economy, for oil demand and for the oil price.
Will OPEC+ switch to cuts or will it leave balancing to a lower price driving US production lower? Add of course also in that OPEC+ has signaled that it will lift production more rapidly and is currently no longer in the mode of holding back to keep Brent at USD 75/b due to an internal quarrel over quotas. That stand can of course change from one day to the next. That is a very clear risk to the upside and oil consumers around should keep that in the back of their minds that this could happen. Though we are not utterly convinced of the imminent risk of this. Before such a pivot happens, Iraq and Kazakhstan probably have to prove that they can live up to their promised cuts. And that will take a few months. Also, OPEC+ might also like to see where the pain-point for US shale oil producers’ price-vise really is today. So far, we have seen no decline in the number of US oil drilling rigs in operation which have steadily been running at around 480 rigs.
With a surplus oil market on the horizon, OPEC+ will have to make a choice. How shale this coming surplus be resolved? Shall OPEC+ cut in order to balance the market or shall lower oil prices drive pain and lower production in the US which then will result in a balanced market? Maybe it is the first or maybe the latter. The group currently has a bloated surplus balance which it needs to slim down at some point. And maybe now is the time. Allowing the oil price to slide. Economic pain for US shale oil producers to rise and US oil production to fall in order to balance the market and make room OPEC+ to redeploy its previous cuts back into the market.
Surplus is not yet here. US oil inventories likely fell close to 2 mb last week. US API yesterday released indications that US crude and product inventories fell 1.8 mb last week with crude up 3.8 mb, gasoline down 3.1 mb and distillates down 2.5 mb. So, in terms of a crude oil contango market (= surplus and rising inventories) we have not yet moved to the point where US inventories are showing that the global oil market now indeed is in surplus. Though Chinese purchases to build stocks may have helped to keep the market tight. Indications that Saudi Arabia may lift June Official Selling Prices is a signal that the oil market may not be all that close to unraveling in surplus.
The low point of the Brent crude oil curve is shifting closer to present. A sign that the current front-end backwardation of the Brent crude oil curve is about to evaporate.

Brent crude versus US Russel 2000 equity index. Is the equity market too optimistic or the oil market too bearish?

Analys
Oil demand at risk as US consumers soon will face hard tariff-realities

Muted sideways trading. Brent crude traded mostly sideways last week, but due to a relatively strong close on the Friday before, it ended the week down 1.6% at USD 66.87/b with a high-low range of USD 65.29 – 68.65/b. So muted price range action. Brent crude is trading marginally higher, up 0.3%, this morning amid mixed equity and commodity markets.

Strong Chinese buying in April as oil prices dipped. Chinese imports of crude continued to accelerate in April following a surge in March with data from Kepler indicating that Chinese imports averaged near 11 mb/d in April. That is an 18mth high and strongly up versus only 8.9 mb/d in January (FT.com today). That has most certainly helped to stem the rot in the oil price which bottomed at an intraday low of USD 58.4/b on 9 April. It has probably also helped to keep the front-end of the Brent crude oil forward curve in consistent backwardation. The strong buying from China is both opportunistic stockpiling due to the price slump but also rebuilding of oil inventories in general.
Oil speculators are cautious with oil demand at risk as US consumers soon will face hard tariff-realities. But oil market speculators are far from bullish. While net long speculative positions are up 52.2 mb over the week to last Tuesday, it is still only the 15th lowest speculative positioning over the past 52 weeks. The underlying concern is of course the US tariffs which is crippling exports of goods from China to the US with bookings of container freight down by 30% according to Hapag-Lloyd. Bloomberg’s Chief US economist, Anna Wong, is saying that empty shelves in US shops will soon be the reality. Thus US-China trade relations need to be fixed quickly to avoid hard realities for US consumers. The lead-times are long and the current tariffs and uncertainty around these is now risking availability for US consumer goods for the holiday seasons in H2-25. Tariff realities for US consumers are increasingly just around the corner. ”Rubber will hit the road” very soon and that is when we might see weaker oil demand as well.
Brent crude traded mostly sideways last week though ended down 1.6% in the end.

Net long speculative positions in Brent and WTI up 52.2 mb over week to last Tuesday but still at 15-week low over past 52 weeks.

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