The European gas year commenced October 1 with expectations of high winter demand and commensurate gas and LNG prices. However, in recent days the press — both trade and mainstream — have remarked on the number of laden LNG carriers that have been circling, anchored or drifting around the Mediterranean and East Atlantic. This flotilla, currently numbering about 30 cargoes, or 2.1 million metric tons (MMt) of LNG, has been growing since late September and includes some cargoes that have been at sea for over a month. Although floating storage ahead of winter demand is nothing new, the scale of the current phenomenon is unprecedented. In today’s RBN blog, we explore the implications for European gas pricing and market dynamics.
A significant number of LNG carriers currently holding cargoes have planned delivery dates at the end of October and early November, a clear hint that these cargoes have been hedged on Title Transfer Facility (TTF) or National Balancing Point (NBP) futures markets. Under the 90-day cargo planning system these cargoes would have been made firm in early September, at which time TTF for November was trading above €200/MWh (roughly $70/MMBtu; see Simply Unaffordable). Many of these vessels are now moving toward their discharge terminals, whereas others are marking time close to their destinations. The overall message is clear: So long as there are berth slots available, there will be a surge of deliveries into Northwest Europe over the next two weeks. And that poses a challenge. European LNG terminals cannot hold stored quantities of LNG in anywhere near the volumes that underground facilities can accommodate, as LNG storage at terminals is designed for operational rather than strategic use. Therefore, as these cargoes are delivered, most would need to be regasified into pipeline systems at high rates to create room for the next LNG cargo.
In the months since Russia’s invasion of Ukraine in February, Europe has been filling its underground storage facilities as fast as possible and storage is now nearly 95% full — well in excess of the European Union’s (EU) target of 80% by November 1 — and regular readers of ours know that as storage fills, maximum daily injections drop. This means that the regasified LNG from the hedged cargoes would need to be sold to meet daily market demand instead of going into storage. Faced with high inventory levels, a need to quickly regasify the LNG and modest demand — the outlook for early November suggests that European temperatures are likely to be mild — there is a real risk that cash prices could turn negative — yes, negative. (It’s rare but not unheard of. Gas traders may recall how the startup of the Langeled gas pipeline from Norway in 2006 led to negative pricing in the cash market as a flood of incremental volumes sought buyers.)
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