This is Dana Perkins and you're listening to Switched on the BNF podcast. Last year was tumultuous for the global gas market. Russia's invasion of Ukraine led to disruption and volatile prices as European nations rushed to find new sources to replace established Russian supplies. This in turn resulted in prices on the Dutch TTF benchmark hitting a record high of nearly three hundred euros per megawatt hour in August of twenty twenty two. Prices have since returned to some
sort of normality, albeit still elevated against historical averages. But as we once again approach winter, just how full are European gas stores and what is the global picture for gas supply and demand? While on today's episode, I speak with bn EF's head of European Gas, Irina Sarada, and also the head of Global leg as well as apat
Gas for BNF Abhishek Rohatki. Today we discuss how full gas inventories in Europe are and which countries are meeting the demand and what's happening on the Asian continent where we typically find the growth markets. We also go through the potential impact of the weather on gas markets during an El Nino year, and how climate change poses a
real challenge to forecasting. Lastly, we touch on how some European countries are actually looking to store their gas in Ukraine, as well as what new projects will be coming online to increase global gas supply in twenty twenty four. If you'd like to learn more, BNIF subscribers are going to be able to access bnef's Global Winter Gas Outlook, which this show is based on, and they can find it on BNF dot com or at BNF go on the
Bloomberg terminal, or on BNF's mobile app. As always, if you like this podcast, if you subscribe, you'll receive an update when future episodes are published. And if you give us a review or a rating on Apple Podcasts or Spotify, you're going to make us more discoverable by others. Now, let's jump into the conversation with Arena and Abashek about the Winter Gas Outlook. Arena, thank you for joining us today. Thank you, Ana and Abhishek, thank you for joining as well.
Thank you, Dana.
So we are here to talk about well the next half year of what's going on in the global gas markets, and we're going to talk about LNG. But this actually is a show very much based on reports that we put out twice a year, which are really important pieces of research. We put a lot of effort into these. We are here today to talk about what's happening with
the global gas markets. Last year, it made headlines all over the world, and in particular from where I'm recording in Europe, it was one of the things that everyday people were talking about because of how much it impacted our energy prices at home. Of course, those in the gas space are looking at this every single year, every single moment, every single day, and we put out two reports a year, half yearly, one which is our Summer Gas Outlook, and one that is our Winter Gas Outlook.
Can you explain to the lay person who's potentially listening right now why we do these reports at half yearly intervals and really who they're designed to target and who's actually listening closely to what we're saying about the upcoming half year in the gas market.
Thanks, Dana's that's a really good question. So usually we put two outlooks just before the beginning of each season, so our winter season in gas world starts in the beginning of October and last till the end of March, and our summer season starts in April and goes all the way till the end of September. So that's why we are producing our outlook just before those season to give market players a bit of a perspective and share our view of what's going to happen for the upcoming
whole gas year. So we are producing for two seasons ahead.
So let's talk a little bit about where we were this time last year, what was the background, and essentially why was LNG and the existing gas pipelines so much at the front of everyone's thoughts in the twenty twenty two twenty twenty three winter.
So last year, as Europe was heading into the winter season, it lost around the third of it supply that was previously coming from Russia, and as you can imagine, it's been quite a shock for the market to balance, and
there's a response to that. Europe turned to LNG, so that's liquefied natural gas, the one that comes on ships or on vessels, and Europe turned in particular to the Global flexible or spot LNG, so the one that is not tied up into contracts, and the challenge with that is that Europe has to go on a global market and compete with other players in order to win that
share of LLERG. So that's triggered the push into gas prices going to the record level high that we've seen last year, and that's been a challenge for the market players to see how it's going to unfold and how to balance the market. So traders and other market players were facing a lot of uncertainty on the market as we were heading into the winter. Is it going to be a cold winter or is it going to be a warm winter? Do we have enough gas in storages
to survive that winter? So those were a big question marks for the market players to handle on the demand side, and then on the supply side, they were worried about how much of that spot lergy Europe can bring into
the region. And back then, our guest team was forecasting that Europe will survive the winter and will end the winter with a reasonable amount of gas in storage and indeed we'll have enough gas to go through the restocking season during the summer period, And to be frank with you, that was not an easy statement to make back then when everyone was worried about the crisis and Europe not
surviving without the blackouts. But the reality is that Europe ended winter season with storages being well about seasonal normal, and now we are in the end of the summer season and Europe is closed to reach one hundred percent full of storage levels. So indeed, our guest team was right and we predicted that it's going to happen and Europe will go through the winter without facing the blackouts and will have enough gas to go through the summer season.
What were the reasons last year, in addition to war taking place Ukraine, what were the reasons that Europeans storage of gas were solow headed into that period.
Yeah, So even the year leading to the twenty twenty two when we see this crisis unfolding, Russia stopped sending the regular amount of gas into Europe and that's why the storage level has been even lower compared to the seasonal normals. So everything was leading up to it.
So with the reduction in supply to Europe, the gas had to go somewhere else, and there were buyers in other parts of the world. Abashak, perhaps you could talk a little bit about where other parts of the world were essentially grabbing up some of this gas supply that wasn't coming to Europe.
Yes, certainly. So we did see some of the Russian cargoes that were previously coming to Europe, they were being sent to the other markets around the world. So we did see some of the cargoes going to China, going to India. And one of the main reasons that cargoes were coming to these markets is because a few of these cargoes were available at a discounted price. So buyers were quite willing to take the Russian energy at the time when the global energy market is quite tight to their shows.
And when you say at a discounted price, what are we talking about.
So in terms of the prices, we usually do not have very good data, but based on the reports that we caught from the various media outlets and our own interaction with the market, some of the cargoes that were coming out from Russia, they were selling at least a ten percent discoune to the market price.
And when you indicated earlier that there was one third less supply coming to parts of Europe, which now has found places elsewhere in the world at a discount. It wasn't all of the Eastern European gas that got shut down, it was a third. So that therefore and firs that there are existing pipelines that have continued to flow. Can you talk a little bit about where we currently stand in terms of what is available and what is not available and really where is Europe's gas coming from? Right now?
You're right that Europe is got in gas not only from Russia, but there are others, for example, pipeline sources that are sending gas into Europe. For example, Norway, after LNG supply, is the second larger source of supply in
the European mix, and that's been very helpful. Europe has been maximizing it production and sending quite a lot of gas last year in particular, that was around if I remember correctly, around ninety five bcm of gas in the previous gas here, so that is a big share to cover. And then apart from Norway, we have some r the pipelines for example coming from North Africa that's supply in Europe. And then there is also a pipeline coming from Azerbaijan
via Top pipeline. So those supply sources are covering some share of the supply mix, but they are not as significant as for example, ler G which is the number one source in Norway, which is the number two source of supply, So Norway and ALLERGI they are covering in total roughly I would say, seventy percent of the total supply mix, which is quite a big share.
So there's the supply sign. But then how about the demand dynamics. There was a lot of conversation around last year reducing the demand, and let's stay on Europe at the moment. Europe responded by having different targets to reduce their demand in a number of different measures across the content,
some differing from country to country. Do we see demand staying suppressed this year or things going to bounce back and essentially, do those same targets continue to exist or you know, as you mentioned at the beginning, if we're close to one hundred percent in storage as essentially that concern over the demand side really reduced.
That's that's a very good question. So last year, indeed, demand destruction or guest demand savings helped a lot to balance the market. And what we expect in our seasonal outlook that we just published on the eleventh of September. We expect demand to be still weak, around twelve percent below the five year average. And if we are looking into European demand, that is split into US three sectors.
So the first one is residential and commercial demand, second sector will be a guest to power demand, and then there is also industrial demand. So I'll start with the residential and commercial demand since it's the biggest share of gas demand. Residential and commercial or as we call it in gas world LDZ demand local distribution zone demand will be unsurprisingly a key balanced item on the market as
during the winter time. For example, residential and commercial demand accounts for about fifty five percent of the total demand, so it's quite a big chunk of demand that we are talking about. So in our forecast, we expect a slight recovery in the residential and commercial demand, bringing about six billion cubic meters of additional gas demand compared to
the last year. The reason for that that is because we are seeing prices lower year and year, but they are still historically high, so that recovery is going to be limited and the wholesale lower wholesale prices will be offset by the end of the subsidy schemes in some countries.
Another reason is why demand savings is going to be persistent as we head into the next winter is because there is also a share of the demand that has been displaced permanently due to for example, electrification of the heating demand or energy efficiency measures that customers implement it. And then there is also we don't we need to remember that there is a permanent shift in the consumer's behavior that was encouraged by the media campaign that we've
seen last year. So those are the factors that are limiting the recovery in the residential and commercial demand. Now moving on to the industrial demand, we expect the similar in a way similar situation that rebound in the industrial gas demand is expected to be limited. Like I said, gas prices a year and year they are lower, however they are still historically higher, so that provides little incentive
for the industry to ramp up gas demand. And then looking into the manufacturing demand, it is low and it is weak and a broader economic landscape remains not promising so far for the industry to ramp up the production. Looking into for example, in some country is like Germany, seeing the mark to decrease in the gas consumption in the industrial sector, and that's because the most energy intensive industries,
they are seeing the reduction in their production output. And then for example, if we're looking into the sectoral split, then chemical sector was the one that saw a consistent reduction in the output. So those are the factors that are supporting the industrial demand to be persistently weak in the upcoming winter and most probably summer season as well. And finally, gas to power demand, we expect it to be higher for the upcoming winter. That is supported by
the closure of lignite and nuclear plants in Germany. However, for the summer season, we expect gas for power generation to be near record low and that's supported with the increased solar generation capacities, so that seasonal difference between winter and summer is going to persist for the upcome in winter. So yeah, that's the overall picture for the demand. I know it's a long answer, but that's an important part of the balance well.
And with liquefied natural gas, this is a truly global marketplace. So Abishak, can you comment on other parts of the world and what the demand is looking like there. Is it growing, is it staying roughly flat from last year. And I'm assuming, and maybe you can correct me on this one, but I'm assuming that those prices that were lower last year are perhaps less competitive this year. What's going on with both prices and then therefore demand in other parts of the world.
Yeah, certainly so. In terms of the prices as compared to the last year, we are seeing lower prices. So for example, we saw price tom back in August September last year, but this year we haven't seen any big change in the market or any big thing happening in the market that can push the prices up. So prices are lower than last year in general, and what this means is that it is bringing.
Wait, the prices this year are lower than last year, even given the last year visited to discount.
Yes, wow, So in general throughout this year we have seen lower prices as are in an earlier mentioned that we have seen in the beginning of the year, we have seen mild winter. So what the mile winter did is that it reduced the heating demand and Europe was able to end the winter at a storage level which was considered quite healthy, quite higher than even the five
year average levels. So what that did for the global allergy prices is that eurof did not need to bring in a lot of flexible cargoes to the various markets, and that's why more lngs available to different markets, and that's why the prices this year we have seen are lower than last year.
Are there parts of Asia that you would consider to be growth markets where demand is increasing given that you've just established that prices are even lower this year than last year.
Yes, So we expect demand to recover in South Asian markets and in Southeast Asian markets as well compared to the last year. And the main driver is the fact that there is going to be an increase in contracted allege deliveries and also comparatively higher sport purchases by various buyers in India, for example, in bangla and in Thailand
because of the lower prices. So last winter, these economies suffered a lot as prices were unaffordable and we saw almost zero spot demand from India and Bangladesh in the fourth quarter last year. But this year we are expecting to see moderate level of spot buying from these countries
because of the lower prices. We also expect India to get more contracted deliveries versus last winter when CEFE which stands for Securing Energy for Europe, so that's an x gas from unit which was taken over by German government to protect its energy security interest. So SEFE had a contract with India and due to non availability of cargoes,
safe stopped the cargo deliveries to India last winter. But this year it has been able to restart the supply, so we expect that India is likely to get more contracted deliveries this year and this will result into higher LNG imports to India. On the Southeast Asia side, we think that Thailand's following production is likely to keep its national oil and Gas company BTIT active in the spot market.
Other smaller markets such as Singapore is also going to see new contracts starting which will raise the deliver freeze. And we have also assumed higher demand in Indonesia because of the commissioning of a new LERG train there which will supply most of the LNG to the local market.
Now, the way that we're structured here at PNF, we actually have someone covering each of these time zones, if you will, So the Americas are covered by a gas analyst and then we've got our European and then our Asia focused gas analysts on the show today. Now, without taking the words entirely out of your colleague, who cannot be here's mouth, what were some of the key highlights regarding what happened last year with LNG as it relates
to the US. And then on from that, how do you expect the North American predominantly gas supply to impact this year's dynamics in Europe and in Asia.
So last year what we saw is that a lot of the US cargoes that were previously coming to the North Asian markets. So when we see North Asia, we mostly refer to Japan, China and South Korea. So a lot of the US ALLERGI that was previously coming to these markets back in twenty twenty one, it was shifted towards zero. So there was a change in the global allergy trade flows from Asia towards zuro for the flexible
allergy cargoes. So when we think about the US ALERGI, one of the main things to highlight is the fact that most of the US LNG is available on FOB basis, which is free on board basis, and what that means is that those cargoes are not restricted to go to a particular destination under some contractual obligations, and this enables the portfolio players the suppliers to supply those cargoes based
on the end user or the end market prices. In last year, when Europe was really struggling to get the gas, prices in Europe were higher than Asia. So what happened is that a lot of the US allgi it ended up in Europe. And we have seen this trend continuing this year because, as Arena mentioned earlier, LNG is still one of the major gas sources to Europe this year and is going to be so in the coming years as well, So we do expect this will continue this
year in terms of the overall LNG supply growth. Also, we are thinking that US is likely to lead the supply growth because we have assumed one of the major projects which was under outage last year is likely to be operational this winter because of the incremental volumes coming from that particular project, so that is a freeport project. We are expecting US is likely to lead the overall global LNGG supply.
As you look ahead to the next half year, how closely are you watching the weather and essentially there could be extremes on either end. And can you explain how let's go with the extreme of a particularly cold weather for the northern hemisphere over the course of this upcoming winter, which sees much more of the natural gas that's currently stored being used. What is the potential worst case scenario.
Yeah, So, as we are approach in the winter season, we are looking into the weather and daily basis, and that's quite an important risks for everyone to take into account during the winter season. So far, what we are seeing is that the predictions on the market is that it's going to be a mild start into the winter season, and we expect temperatures to be about normal throughout the October months. And then as we are looking into the entire winter again, the forecast is for this winter to
be milder and wetter compared to the average one. So
that gives some hope. But then if you're looking into, for example, European gas price spreads over time, if we are comparing front months with the first quarter of twenty twenty four, the market is in contango, meaning that contracts for later dates are more expensive compared to the spot once so that means that the market is pricing in those risks, and one of them could be a weather related So if we're seeing a particularly cold winter, that could displace quite a lot of gas from storages and
that will challenge Europe in terms of how to go through the winter and then for the following summer how to restore that storage inventories.
But as of right now, it's looking pretty mild. And then another question, and as somebody who hails from California and definitely knew when it was an El Nino year, is it too early for us to decide whether or not this is an El Nino year? And if it is, what does El Nino do to well, first of all the weather, but more importantly for this show natural Gas, I think.
For this particular winter we are going to see in Europe the impact from El Nino is it Europe is going to be milder and wetter, which is a positive sign for Europe, meaning that we will be able to keep those storages at a reasonable level of fullness throught the winter and throughout the summer.
And very simply put, El Nino is a warming of the Pacific, which essentially does change the weather all over the world, but it certainly impacts certain regions more than others. So Abashak living in a part of the world that actually it borders the Pacific Ocean, how does Anino impact the gas market in your part of the world.
So in the North Asia, we have done some analysis using over CAAs demand models, and what we observe is that if we look at the historical data, if we look at the Alino ears, the gas demand in those
particular years has been lower than the normal. So what this means for the gas demand for the North Asian markets is that if Alino happens this year, it is likely that North Asia will also need less gas for the power sector, for the city gas sector, and this may actually help the overall market in terms of prices. So it would be a good news for the europe But other thing I wanted to highlight about Alino is that besides North Asia, it also impacts other parts of
the world. So, for example, it can bring dry weather in South America and this year we have observed low water levels in the lake that feeds the Panama Canal, and because of the low water levels, it has been difficult for the ships to cross the Panama Canal. And what this has done is that the ships which are coming from US, let's say they needed to cross the Panama Canal to go to let's say Japan or China, they are taking a longer route via Swiss Canal or
another direct route. So that is creating bottleneck in terms of the shipping lanes, and this may actually result into price volatility. So Alino, we think, is a bag of mixed news. It can reduce the customer, but it can also increase the difficulties in bringing the cargoes to issue.
And Abishek you highlight that not only are you and your team looking at current weather patterns, but you rely a lot on historical weather patterns. My question really comes to climate change and whether or not some of the historical weather information that you rely upon, whether or not you're looking at it differently as we're starting to see some of the changes that are actually part of climate change come to fruition now and how much that really well, how difficult that makes your modeling.
That's a very good question. The short answer is it makes the model being extremely difficult because in order to analyze the impact of al Nino, for example, while accounting for the global warming, we really need to be very careful about the number of historical years that we are
taking into account in our model. So just to give you an example, if we take into account last ten years of weather data, Alino appears to be reducing the cast demand, or if we take last thirty years of father data, al Nino years also have higher gas demand in some parts of the world. So what this means is that moving from last thirty years to last ten years, it is possible that global warming may be impacting the cast demand in a more significant way as compared to Alnino.
So for us, identifying the impact of Alino versus global arming is an extremely challenging task, and hence we have to be really careful about the number of historical years we take into account.
So just pivoting a bit back to well llenng in this year specifically and actually onto geopolitics, Assuming that the Russian invasion of Ukraine continues this year, what does that mean for gas markets? And should things worsen, which I certainly hope that they will not, what does that mean for the global gas market.
So so far, Russian flows have been stable via Ukrainian route and as we all know that Russian gas transit contract with Ukraine is expiring in the end of twenty twenty four, so I'm sure that will be an interesting topic for the discussion on the market, despite the fact that Russia is not supplying a significant amount of gas
as it used to do a year or two years ago. However, as we are talking about the Ukrainian route, I think it's important to bring in the fact that European companies started sending gas into Ukrainian storages and so far what we have seen is that they started sending it in July and then ramping up in August. So far they accumulated around two billion cubic meters of gas in Ukrainian
storages under so called customs ware house regime. So custom ware house means that European companies can bring gas into Ukraine and then store it for up to three years without paying any customs or text duties and bring it back to Europe. So having that two BCM in Ukrainian storages gives us a bit of a proxy in terms of how much European companies are utilizing Ukrainian gas and how much of that gas can be used as a buffer, for example, in the upcome in winter. If they decide
to bring that gas back into Europe. However, it's an interesting question to see what's going to happen with that gas. Is it going to be brought back into Europe or it will be sold on the domestic market in Ukraine as we've seen previously in the year twenty twenty one, or is it going to be carried over for later for maybe next winter season.
So you've established that there is a buffer, and one of the lessons that I learned from last year is an incredible amount of flexibility in the global LNG gas trade. So how flexible would you say the LNG market is in filling in any sort of issues that may arise on the supply side.
That's a good question. So Europe, as I mentioned before, is now dependent on spot llergy market and as we know, it's not an unlimited supply, So there is a pool of global energy supply that is not tied up into a contract and Europe would need to compete with other
buyers to get or to win that gas. So far, in our seasonal outlook, we expect Europe to attract around fifty or fifty two percent of that global spot energy, which is quite a big sure, we are talking about in million metric tons, that will be around fifty five million metric tons, which is quite a significant amount, and that is about a quarter of the total supply mix
in Europe. So, as we can see, Europe is quite dependent on that spot energy and obviously to attract that gas it has to compete with Asia for example, so we are expecting to see that Europe would need to price accordingly to win that gas. So far as we are looking into the differentials between Asia and Europe, Asia is at premium. However, if we are looking into the ship and differential, that premium might be eaten up by
those transportation costs. However, it would be interesting to see how the situation is unfolding and depending on where the prices are, who will get that spot allergy and.
You noted that this is not an infinite supply which then leads me to wonder are there increases on the supply side presently and are there new projects that we should be aware of.
So, like I said, Europe is now energy spot dependent, so it has to increase its regassification capacity, and looking into the upcoming year, we expect the regasification capacity across Europe to increase by around one hundred and ten mcm million cubic meters per day, So that's compared to last year we had in total four hundred Now it's going to be around five hundred thirty million cubic meters per day. The most growth is expected to come from Germany, followed
by Belgium, France and Italy. So Europe needs to increase that capacity in order to attract a higher level or higher share of that flexible Llerenchy and I'll pass on to Abishak to comment on the global energy supply increase.
So in terms of the LNG supply, so besides the growth coming from the US, we are expecting startup of new facilities across the Atlantic basin and the Pacific basin. Some of the projects, for example include Arctic Energy two in Russia. We have Altamira fast Lergy in Mexico, tangu Train three in Indonesia. Then we also have projects in Mauritiana, Senegal and in the Republic of Congo. So all of these projects are going to add new supply to the
global allergy balances. But I would also like to highlight some of the possible risks to the growth of the supply. We have seen a number of projects struggling with the feedcare supply. So these are the operational projects in Nigeria and Egypt. There could also be some risk from the possible hurricanes in the US Gulf Coast where plant operation
may be impacted from bad weather. Besides this, one of the key risks to the global energy balances next year may come from continued sanctions or additional sanctions on arctical Eergy two. So Optical Eergy two is adding quite a lot of volumes to our balances. So this is the project in Russia and this is going to commission its first train by January next year if there are more delays in the commissioning of this project, so this is going to be a test for NOATECH whether they can
commission a new project and operate a new project. So before the Western companies were involved in the project, they used to help Russia in order to operate these projects. But because of the sanctions, a lot of its Western partners have left the project and so any delays in the commissioning of up to two is going to impact the global allerge balances in a very significant way next year.
So as someone who has to think about a title for this show, I know you also need to think about titles when you're writing your reports. So European Gas Winter Outlook and Global Winter Outlook twenty twenty three to twenty twenty four certainly tells everybody what they're reading when they're looking in your research, but you give them a little bit of a second title to kind of let everybody know what. Well, I guess what the headline is.
So for the European Gas Winter Outlook it says healthy but fragile, and for the Global LNG Winter Outlook, it says caution amid supply risk. So it seems like we're cautiously optimistic am by getting the right tone there, because I can understand sitting down and not wanting to make a headline that essentially says, hey, everybody, it's going to be fine. But reading the subcontext, that does seem to be where we're looking at next year. And so what
did you mean by these titles? What is healthy but fragile and what is caution amid supply risk?
I can start with European one, so we called it halsibat fragile because European gas balance now is looking housier. European storage is ninety five percent full, which gives hope for the week. However, as we've seen with the past recent events that European gas market remains sensitive to any supply risks. So for example, when there was talks around Australian strikes, then the market responded with high prices. Extended
Norwegian maintenance also a triggered high gas prices. So that shows us that despite the fact that gas balance looks healthy, we have plenty of storage levels, Europe is still sensitive to any risks of the supply disruption. So that's why we called it halcy butt fragile.
And for anybody who's never written a title, I can tell you it's quite difficult to try and figure out the entire message you want to send in three to four words. So abashak over to you on the Global LNG Outlook title So caution emits supply risk. What was it that you were thinking when you were selecting these four words to really encapsulate your thoughts? Why did you choose them?
So the recently chose the word caution is because we do see lots of uncertainties in the North Asian markets on the land supply side and also on the weather side. So for example, in the case of China, if China receives lower than expected pipeline imports from Central Asia, then it can increase lenty demand from China. Other risk is a stronger economic growth scenario for China and likewise for Japan and South Korea. Lower than expected nuclear generation may
also increase the demand for spodcard. So in summary, we do see a lot of uncertainties across the different markets on the supply side and on the weather side, and that's why we did one to say that we are cautiously optimistic for.
The coming inter arena and Abishek thank you very much for joining today.
Thank you, Dana, Thank you Dana.
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