European Natural Gas Outlook 2019-2020

Europe has cemented its self as the swing buyer in the global gas market: increasing supply and slowing consumption growth has led to Europe absorbing more LNG in 2019. Although indigenous gas production in Europe has declined, driven largely by the Netherlands and the UK, Russia has increased flows to Europe, despite the flood of LNG. Typically, consumers are locked into long-term contracts, Gazprom’s Electronic Sales Platform (ESP) has allowed for short-term flexibility to let Russia compete for market share. Europe started the year with high inventories due to a mild winter, and so the influx of gas has exerted significant downwards pressure on prices. However May to July saw pressure ease due to maintenance of the Nord Stream pipeline and lower LNG volumes landing in Europe due to a wider JK M -TTF differential. Low prices have incentivised price responsive demand, but the idiosyncratic nature of the power sector has prevented a linear increase in consumption . Whilst prices have been within the coal-to-gas price switc hing range, the impact of regulation and incentives has dampened the scale of the switch . Spain ha s seen the majority of the coal- to - gas switch in Europe this year, with Germany, France and Italy favouring renewables, and the UK having already exhausted most of its switching capacity. On the demand side, low prices will likely spur additional consumption for gas switch as marginal gas plants are incentivised. However, i f the market won’t balance through price sensitive demand at current prices, supply side must rationalise to avoid inventory overfill. On the supply side, t he growth in U.S. LNG was driven by two new terminals being brought online in 1H19, with the European market taking up over 85% of the 9.19bcm yoy increase. Aside from the weather, the strongest bullish driver is the potential disruption of Russian flows via Ukraine, if the transit agreement is not renegotiated. We expect gas markets to remain oversupplied through winter, which will continue to exert downwards pressure on hub prices. While seasonal demand will support prices to some extent, with storage levels so high, there is a limit to the upside . The forward curve averages $5/MMBtu over 4Q19. This reflects the market’s view of a potential disruption to Russian flows due to the current renegotiation of the Russia-Ukraine transit agreement. Our expectations are that an agreement will be reached (more likely an extension) , and in our view , the forward curve is therefore overpriced. Contents Introduction and Outlook 2 Supply 7 Demand 13 Price outlook 17