Euro gas illiquidity deepens as security between shippers tightens

Liquidity issues for market participants in the wholesale European gas market are deepening, sources have told S&P Global Platts, with lines of credit wearing thin between shippers, suppliers and buyers as part of long-term contractual agreements.

Already beset with higher requirements for trading and imbalance collateral from exchanges, brokers and networks amid sky-high energy prices in Europe, over-the-counter (OTC) trading underpinned by such agreements is now also feeling the strain, as sellers in particular are now seeking greater security from their buyers for forward purchases.

These additional collateral requirements are exacerbating already stretched credit lines, which have considerably decreased the amount of trading capital companies are able to free up for the purchase of derivatives to hedge against future volatility and potential prompt-price spikes as winter progresses.

"It has generally manifested itself with suppliers asking customers for security deposits or parent-company guarantees (PCGs) in order to cover the additional credit risk associated with the value of their contract based on the current prices," a UK gas and power portfolio manager told Platts.

"For our customers, it would limit forward purchasing more than limit usage," they added.

Market participants have largely attributed record volatility in October to the liquidity issues they have faced, although future uncertainty and supply flexibility for winter purchases has also been cited.

"For me a big issue is the cash situation," a trader for a German utility told Platts. "You need a lot of cash for all those margin calls."

"The cash is a daily thing, every day you have margin calls with the exchanges and [commercial] counterparties [for] the actual settlement of the OTC deals."

The utility trader also referenced PCGs, and how these can act as a secure guarantor for a subsidiary's purchasing activity, although not for credit in the traditional sense.

"If your agreement is linked to a PCG then all could be OK," the utility trader said, "but come settlement date you really have to come up with the money... a guarantee is then not enough: where is the actual money?"

"[What if it] turns out that the mother-company can't raise the cash for the actual settlement?" the trader said.

The UK portfolio manager acknowledged that purchasers would effectively have no choice but to meet the additional security requirements in the short-term, although in the interest of maintaining a long-standing agreement, flexibility within or exterior to such agreements could be granted by the supplier.

"There can often be discussions between customer and supplier about how to alleviate their credit concerns without having to put down a huge security deposit," they said.

Credit when it is due

Europe's record-breaking rally in wholesale natural gas prices in 2021 has been predominantly caused by a rush to inject any scarce volumes on the prompt, and hedge winter contracts in what is expected to be an extremely tight heating season.

Every effort on the part of European shippers appears to have been made in this respect amid very difficult circumstances, despite the rising prices limiting their ability to do this.

Analysis of Platts pricing data indicates that the rally itself may finally have run out of steam, with the Oct. 22 Market on Close assessment for front-month delivery of 219 pence/therm tipping its 15-day moving average lower on the day for the first time in two months.

"It doesn't want to set fresh highs at the moment," the portfolio manager said. "It had the opportunity with Gazprom not booking any additional capacity via Ukraine this month, but after the initial surge, it had already weakened by the end of the day. It has been the catalyst in most other months."

The fact that the price rally could not be sustained beyond the immediate fallout of the auction could reflect a lack of buying support for winter months, should these future delivery periods be adequately hedged for physical consumption.

However, with credit issues already impairing a shipper's ability to execute further purchases for winter-demand peaks, spare storage capacity in Europe is now also likely to be deprived of further critical volumes ahead of winter, with this now seemingly being given a lower priority as rising demand saps prompt availability for this purpose.

"If you need the cash, you also don't want to inject," the utility trader said.

On the upside

With the long-term trend now leveling-off, intraday volatility in October has still been beyond anything previously experienced in the wholesale market, with daily, or even hourly moves, now being observed in excess of historical daily increments. This volatility remains a subject of debate in the industry, despite it too now starting to dampen slightly.

"We know that we are in trouble for this winter, so we over-react with each piece of news," the utility trader said.

"To the upside, I think the driving factors are much the same as they have been for much of the year," the portfolio manager said referencing earlier comments. "On the downside, I think increased wind output, industrial demand destruction, increased Norwegian flows and Japan reaching comfortable storage levels are factors."

For much of summer, Europe has nevertheless found volume to inject, with the majority of the deficit between this year's storage level and the previous shortfall in 2018 being the absence of Russian inventory within their European capacity. Pan-European inventory on Sept. 30 was 6.097 Bcm lower in 2021 than it was in 2018, data from Gas Infrastructure Europe showed, with Germany's Rehden and Haidach GSA in Austria accounting for 5.148 Bcm of this difference alone.

Exchange trading volumes are also healthy and close to normal, which is leading participants to question whether or not the volatility is justified, and who may be causing it if physical liquidity is a problem.

"Physically we are still doing OK, also traded volume on the TTF curve is still fine, but next few settlement dates on the 20th of the month will be interesting," the utility trader said.

"Perhaps [there is] nervousness about prices being at these levels... some people will be making a lot of money," the portfolio manager said.