By Eleftherias Kourtalis
The risks for a further rally in natural gas prices are increasing after the new developments surrounding Gazprom’s flows, as Goldman Sachs points out in its new report, while it estimates that the summer of 2023 will also be difficult. “It is unlikely that Europe will see sustainably lower prices before 2025, when global LNG supplies will also start to increase significantly,” he says.
More specifically, he notes, news that Gazprom plans to cut Nord Stream 1 (NS1) flows to around 20% of capacity this Wednesday, from 40% currently, with an impact of 30 mcm/d, drove prices of natural gas in Europe on a rally, with the TTF rising by 14 euros per day to 176 euros/MWh, the US bank notes.
The possible drop in flows appears to be related to President Putin’s comments last week about removing one more turbine from NS1, while the repaired one he brought from Canada has yet to be reinstalled.
“While we expect NS1 flows to be restored to a 40% run rate once the repaired turbine is installed, we believe uncertainty around Russian flows remains high,” Goldman emphasizes. The opacity behind the scale of the flow cuts through NS1, as well as the absence of any re-routing of the reduced flows through an alternative pipeline to mitigate the impact on supply, suggests that Russia’s natural gas exports are both a political/economic decision , as well as technique.
In terms of price risks, Goldman maintains its estimates and under its baseline scenario where NS1 is at 40% capacity, natural gas prices will strengthen towards €170/MWh throughout 3rd quarter and will help to fully store it at 90% at the end of October. Conversely, a zero flow would likely raise the TTF above €210/MWh in its view. The 20% run rate scenario for NS1, noted in reports yesterday, suggests a possible near-term price upside to around €190/MWh.
Goldman Sachs recalls that its price expectations incorporate the estimated impact from mitigating factors such as coal restarts, industrial gas acquisitions, consumer and business demand and possible enhanced LNG imports. And while this month to date consumer demand for natural gas in NW Europe is 12% higher than expected, this has so far been offset by higher-than-expected LNG imports.
These strong imports have kept NW European storage facilities so far on track to reach 90% occupancy by the end of the summer, taking some of the pressure off prices, resulting in TTF modestly below Goldman’s forecast for €170/MWh, closer to €155-160, until yesterday’s NS1 news.
“As China’s economic activity continues to recover in the coming months, we expect increasing competition from Asia for LNG cargoes to reduce NW European LNG imports relative to current levels. This in our view will bear the brunt of rebalancing the European gas market to demand, requiring a further decline to ensure comfortable storage levels before the onset of winter,” the US bank notes.
Goldman thus maintains its view that if storage reaches 90% by the end of October, as it expects, the urgency to “crush” demand from high prices will diminish, allowing European gas prices to fall in tandem. if of course the winter is not colder than usual. This is especially true for the first quarter of 2023, because the uncertainty of winter weather is significantly reduced in the second half of winter compared to the first half, and thus the natural gas price in this period is forecast to move below the 80 euros.
However, Goldman expects European gas prices to be driven higher once again during the summer of 2023 as demand “devastation” due to the absence of normalized Russian gas flows comes back into focus. “Europe is unlikely to see sustainably lower prices before 2025, when global LNG supplies will also begin to rise significantly, making it easier for Europe to build up natural gas storage without having to resort to destroying industrial demand,” he concludes. the bank.
Source: Capital
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