TTF and European natural gas supply/demand balance sheet by @andrepaltry / @NatGasWeather

As usual, when I’m on deck, I try to get a few people much smarter than me, who owe me favors, to report back to you…

So this is my friend, and Nat Gas expert, Andrea Paltry of with a nice note:

TTF and supply/demand balance for European natural gas

Finally, we exceeded the 80% storage level at the EU level. In some countries, such as Germany, we are close to 88% (see graph below). Yes, we are talking about natural gas and this stock level has not been reached in the most economical way possible. Indeed, assessing the movement of the TTF front end contracts over the past month, we can easily see the highest volatility on record. Indeed, the price of the September contract touched 350 euros per MwH on the last day of trading before collapsing to reach 200 euros per MwH after the switch to the most traded October 22. Why this movement? Speculation as most people think? In fact, there is an explanation related to the Supply/Demand balance and the level of stocks that we have reached. Indeed, all operators (private, quasi-governmental, etc.), in order to reach this threshold level of 80%, massively buy each marginal physical molecule on the spot market to store it, exploiting the form of contango of the spot futures contract. If we buy every marginal unit of gas, in an uncoordinated fashion, the spot price and the futures curve shoot up. What I mean is that we achieved what people define as a ‘safe level’ of European natural gas storage, but it was expensive and, in any case, within the five-year average.

Now, what’s the next step? Are we safe to get through the winter? Here, several points must be analyzed.

First of all, even if reach 100% storage level, we need stream. In fact, the level of storage in different countries is around 20 to 30% of total consumption and we generally use them to meet the peak in heating demand. Flows, as well as production, are necessary. Currently, the Russian gas pipeline accounts for 9% of total EU imports. Someone may think this is a very slim level compared to 40%, and it is true, however, this marginal gas is quite large and very difficult to replace since LNG imports are almost at their peak. With the Nord Stream 1 pipeline closed indefinitely, the Sudzha pipeline will be of paramount importance. If we also reduce this import, the price of TTF can jump indefinitely until demand is reduced. We just talk about pipeline because we are getting Russian LNG imports into Spain (and this has increased over the last few months).

Second, LNG imports. Right now we blame the price and volatility of the TTF, but it’s the same TTF that allowed us to fill the storage. If we evaluate the charts below, we can easily see the top US LNG destinations in June 2022 compared to 2016-2022. The TTF-JKM spread allowed us to obtain most LNG exports and fill storage. We need this spread for the whole winter, we need high prices to have flows, while waiting for the recovery of Freeport (probably in November, and we will have 2.2 bcf/day more).

Third, Weather report. Even if we keep all the flows from Russia via pipeline and even if we maximize the flows from other important countries like Norway and Algeria (Transmed) and even if we keep these LNG imports all winter long, we need at least normal time. If we experience a heating standard deviation of 2 or 3 degrees above the 10-year average, the situation will not be pretty and we would need a huge rationing. Therefore, carefully monitor the weather and heating degrees from mid-October.

Andrea Paltrinieri
Associate Professor of Banking and Finance, Università Cattolica del Sacro Cuore
Natgasweather and Energy Working Analyst

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