European gas – a question of timing
European gas prices have fallen dramatically this year, down 50% year-to-date, reports Barclays Capital. Near term, the bank sees little prospect of improvement, with storage levels now 42% above the five-year average and new supply still being added. However, it does see geopolitics, along with normal seasonality, as having the potential to provide some relief into year-end.
Longer term, all of its analysis suggests that imports of natural gas into Europe need to increase with the region moving from a 'sink’ for LNG to a genuine demand centre – something the bank sees as feasible by the end of 2021.
From a company perspective, the bank sees Equinor, OMV and Shell as most exposed to gas prices and, as such, expects potential downgrades to consensus capping share price performance over the next three months. However, at the same time, it is becoming more confident that the global gas market tightens from 2020 and therefore sees any weakness as an attractive entry point.
Highlighting key trends, Barclays Capital notes:
Gas prices to remain weak in the near term: The Dutch TTF and UK NBP benchmark gas prices are down 46% and 53% respectively year-to-date. This follows a milder than normal winter with the build-up of inventories intensified by stockpiling ahead of the expiry of a key transit deal from Russia at year-end. Gas inventories are now 42% above the five-year average, new LNG supply is still entering the mix, with demand unlikely to recover until the winter the Bank expects prices to remain depressed until at least October 2019.
Europe to become more reliant on imports: Gas imports are forecast to increase by ~70bncm over 2018–2025, or 3.2%/y, versus demand growth of ~1%/y. This reflects a decline in production and, although new pipeline capacity is coming online from Russia and Azerbaijan, LNG imports are expected to play a larger role with Europe’s role changing from a 'sink' to a genuine demand centre from 2021.
LNG market to tighten from the end of 2020: A global LNG supply deficit of 19mn tonnes is forecast in 2021, rising to 40mn tonnes by 2023. This has positive implications for gas pricing in Europe with the region becoming increasingly dependent on imports.
Company exposure is well known, timing is key: Equinor, OMV and Shell are the most exposed stocks to global natural gas prices and are likely therefore to see downgrades to consensus in the near term. This, however, does not change the bank’s underlying view of a tightening global gas market and presents an attractive opportunity to build a position, in its view.
Geopolitics may provide some relief at year-end: Ukraine is a key supply route for Russian natural gas to Europe, delivering ~18% of Europe's total needs. A 10-year transit deal with Gazprom expires at year-end, and any failure to renew it may drive down inventory levels more quickly than forecast, especially if the Nord Stream 2 pipeline is delayed into 2020, as now appears more likely.