A few days ago, Deutsche Bank strategist Jim Reid asked if July 22 would be the most important day of the year for both Europe and the rest of the world, as that's the day when Russian gas should resume transit on the Nord Stream 1 pipeline, to wit: "while we all spend most of our market time thinking about the Fed and a recession, I suspect what happens to Russian gas in H2 is potentially an even bigger story. Of course, by July 22nd parts may have been found and the supply might start to normalize. Anyone who tells you they know what is going to happen here is guessing but at minimum, it should be a huge focal point for everyone in markets." Hinting that they may have some clue about what happens with Europe's gas market in three weeks, overnight Goldman's European commodity strategists wrote a note titled "Increased supply risks lead us to raise our TTF forecasts" in which they note that the 60% reduction in Russian gas exports via the Nord Stream 1 (NS1) pipeline in place since mid-Jun has left net Russian flows to NW Europe near zero, with most of what's left in the pipe re-exported out of Germany towards Czech Republic and from there to other buyers. This has raised gas supply uncertainty in Europe ahead of NS1's full maintenance in mid-July, driving TTF prices up 70% in the period to 168 EUR/MWh as a result, the highest since the Ukraine invasion in March.
Why does this matter? Because as Goldman's Samantha Dart writes, while she initially assumed a full restoration of NS1 flows following its upcoming maintenance event, she no longer see this as the most probable scenario; "instead, the lack of resolution around required turbine repairs, and the absence of any Gazprom-driven re-routing of the reduced NS1 flows via an alternative pipeline to mitigate the impact to supply suggest a prolonged reduced flow rate at NS1 is more likely going forward."
Accordingly, Goldman has revised its TTF price forecasts to reflect such a scenario around NS1 flows post maintenance. Specifically, the bank raises its 3Q22/4Q22/1Q23/Sum23 TTF price forecasts to 153/121/77/138 EUR/MWh from 104/105/76/75 previously, vs current market forwards at 163/166/159/106. In other words, the Q3 price is raised roughly 50% and the full 2023 price forecast nearly 100% higher!
Goldman's revised forecasts embed a modal scenario of NS1 flows returning following maintenance at their current 40% run rate, while the bank still sees a full cut of NS1 flows made permanent as the least likely scenario, as shown in the table below.
This is because keeping export flows this restricted would largely leave Russia's flow flexibility one-sided - flows could only go up from there. Further, keeping NS1 at zero post maintenance would effectively eliminate most, if not all, of Russia's TTF-indexed revenue from gas sales, limiting any revenue upside that would come from subsequent spikes in TTF prices. It would also imply an accelerated rate of Russian gas production shut-ins relative to the 9% year-to-date year-on-year decline in Gazprom production reported so far.
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To be sure, the path ahead for European gas prices will be impacted by several different drivers, not least of which the level of storage at the end of summer the market will be comfortable with. Hence, Goldman's price forecasts under each scenario shown in Exhibit 7 embed specific storage targets, as well as the estimated impact of mitigating factors such as coal restarts, government-led buy-backs of industrial gas, residential and commercial responses and potential incremental LNG imports:
Finally, while price-capping measures applied to Russian gas have also been discussed, Goldman - similar to us - does not believe that these will be effective in reducing Europe's gas tightness or even gas prices at the margin, as such measures would not bring additional supplies into Europe.
Given the high volatility in the front of the curve and its expectation that the ongoing European tightness is not likely resolved in the near-to-medium term, it's hardly a surprise that Goldman continues to recommend long TTF exposure further out the curve, on the Dec23 contract, currently priced at 104 EUR/MWh, and which Goldman sees rising by about 40%! An alternative way to express this view is to go long Sum24, since it's pricing at much lower levels at 69 EUR/MWh, below minimum industrial-demand-destruction price levels of 75 EUR/MWh.
By Zerohedge.com
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