The Market Outlook – Storage & Security: Where are we now?
Welcome to our latest 'Markets and outlook' blog where we'll be taking a look at the energy market now following last year's market spikes and volatility. We explore where storage levels are sitting without Russian flow and gain insight on energy security throughout 2023.
Have earlier predictions come true in relation to capacity, pricing and demand, or has the market seen some stability over the last few months? Charles Ramsay, our Senior Customer Solutions Analyst here at TotalEnergies looks to answer these questions and Shares his insight into the market and outlook as we head into the summer.
A heightened confidence
The wholesale gas and power markets in the UK have seen less volatility in comparison with last year. Yet, unique challenges remain, and we are still seeing prices and instability at levels higher than those prior to the Russian invasion of Ukraine. There are a number of issues which still persist in the market that featured in our last blog as market participants now focus strongly on the coming winters.
Nevertheless, prices have largely come down throughout 2023, with risk premiums eroding and there has been widespread sense of heightened confidence in terms of supply and demand, compared with the position we found ourselves in at this time last year. Although, this level of confidence has been tested this past week with extensions to key Norwegian infrastructure announced by Gassco (Norway's gas transport operator), at a time where temperatures are high and air-cooling demand is being illustrated. These extensions will see capacity cuts being lengthened into the middle of July rather than June and will continue to take significant volume away from the market.
Natural gas and electricity prices coming into last winter remained at very high levels, with significant risk priced in to ensure Europe attracts LNG and incentivizes demand cuts. However, as the winter months progressed, with mostly mild temperatures combined with demand destruction efforts and limited competition from Asia, the risk premiums began to peel away with time and prices fell.
The continent managed to achieve a comfortable finish in terms of natural gas storage, amounting to above 50%, gifting the summer filling season a welcome head start. UK aggregated Medium Range Storage levels are low, with slower injection rates, however with the addition of Rough volume the levels look fairly healthy.
UK aggregated storage levels aren't as sizeable in comparison to countries in Europe, however with the addition of Rough storage facility at the tail end of 2022, total stock levels are sitting at around 48%. Rough came back online at the end of 2022 after it was shut down due to costly maintenance and lack of profitability.
The facility was needed for additional storage requirements in the wake of the energy crisis, where various measures have been taken to wean away from Russian gas. The site can be utilised at 20% currently which has boosted total capacity significantly in the UK, but still much lower than the likes of Germany and The Netherlands.
So, what are the other factors that have supported the supply position?
LNG receipts, Freeport return & FSRUs
LNG (Liquified Natural Gas) receipts to Europe and the UK have been strong throughout the winter heating period and into summer, assisting the summer filling process. European receipts are demonstrated in the below graph, which shows an increase in LNG volumes received in Europe over the timeline.
The Freeport LNG facility returned to operations in March-23 after the fire at the US terminal exacerbated supply issues last year and has begun sending some cargoes which are being well received in Europe.
To facilitate increased receiving capacity in the continent, Floating Storage Regasification Units have been implemented in several countries such as Germany and The Netherlands, in a bid to diversify away from Russian gas and provide energy security.
A lifeline from Norway
Piped flow from Norway has provided the continent with a lifeline in lieu of lost Russian gas. Since the middle of April however, there have been considerable cuts to volumes of natural gas transiting the pipelines that feed Europe and the UK. This is due to yearly maintenance that is required across the ageing infrastructure and various other unplanned issues which impact capacity. The cuts in supply haven't overly impacted prices whereby we've seen continuous downward momentum in recent months.
However, extensions to maintenance on key infrastructure, which will now see various fields and facilities back online in July rather than June, has concerned some market participants, as supplies tighten up. This has been seen as a key contributing factor to the UK NBP going into bull mode over the past week.
French nuclear situation
Nuclear capacity from France has been an issue throughout last year and this year too, which has exacerbated supply issues in Europe. France historically has been a net exporter of electricity to neighbouring countries and heavily reliant on its nuclear fleet, however due to stress corrosion on many dated reactors, this wiped out over half the fleet and deemed them offline. This has attributed to the lifting of both gas and power prices in the UK and Europe, with gas prices being linked to electricity.
The situation in France regarding the nuclear fleet has been a major factor with the market keeping a close eye on any developments and delays which have been announced regularly. Currently we see around 58% capacity from the fleet, which is higher than his point last year and is expected to rise through to the end of 2023.
The Japan Korea Marker is the Northeast Asian price index for deliveries into Asia. Due to supply issues over the past year, Europe has been deemed as a premium market which has helped cargoes being delivered here rather than Asian destinations. As prices have come down in Europe however namely on the TTF (continental European price point) and demand is showing indications of uptake in Asia, this could be seen as a risk looking forwards and potentially could draw cargoes away from Europe as a terminus.
Risks going forwards remain, but at present we find ourselves in a strong position in terms of supply security. On the whole, healthy piped flow from Norway has been received in times of requirement, as well as sustained LNG deliveries and pan-European natural gas storages exceeding the 70% mark at time of writing. To quantify in terms of European natural gas storage we are currently at a level nearly 20% higher than the five-year average.
The European Commission have mandated levels to be at 90% by the beginning of November 2023, which is currently on track to be achieved ahead of schedule. Although LNG deliveries into Europe have been plentiful, as alluded to in this blog post, if JKM demand picks up and prices increase in Asia, this could see cargoes drawn away which is a risk going forwards, especially when the colder months take grip later in the year.
Other risk going forwards are any deviations to the French nuclear schedule, extensions to Norwegian outages and further unplanned capacity issues.
A curtailment of the last remaining Russian flows and LNG shipments, or a cold winter could quickly deplete the natural gas storages Europe so far have been so resilient in filling. Lastly, a high demand for air cooling if the temperatures soar for a sustained amount of time, and any renewable generation decreases. There are many other factors to consider but these are some of the key ones to keep an eye on, as the year progresses.