London — The events Friday which saw European gas prices soar after Norwegian deliveries to the UK were reduced could mark a renewed period of volatility as market players are forced to consider the possibility of uncertain Norwegian export behavior for the whole of the summer.
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The European gas market was spooked early on Friday when flows via the Langeled gas pipeline to Easington in the UK dropped as much as the equivalent of 37 million cu m/day -- triggering a price jump not just intraday but also further down the curve.
Flows were nominated back up later Friday afternoon -- but an end-of-trading-day "short squeeze" pushed prices further up with UK NBP and Dutch TTF settling more than 10% higher on the day for delivery periods through September 2019, the end of the summer season.
Prices corrected back downward slightly Monday -- but the risk remains that Norway's key upstream player Equinor could continue to flex its production sharply over the next few months.
Key to the market shifts on Friday was the fact that there were no announcements of any outage in the Norwegian system -- leading traders to assume that Equinor had opted to reduce summer 19 output from its key Troll field earlier than expected.
In the past, Equinor has used two of its key assets -- Oseberg and Europe's biggest gas field Troll -- as flexible fields, deferring near-term production to when prices are trading higher at a later date.
The premium of the UK NBP Summer 20 contract over the now-expired Summer 19 contract was as high as Eur2.50/MWh by the end of March, while the Summer 20 contract is also trading more than Eur3/MWh above the day-ahead NBP contract.
However, some traders pointed to the fact that buyers had down-nominated their daily purchases on lower forecast demand for Friday.
Equinor declined to comment directly on the variations in flows on Friday, but said it retains the ability to flex its production depending on market conditions.
"Our sales of NCS gas are driven by production and generally we sell what we can produce and seek to maximize the value of our production," an Equinor spokesman said.
"On the NCS we have two swing producers (Troll and Oseberg) where -- to a certain degree -- we can optimize production according to demand signals," the spokesman said.
UK demand did move lower Friday compared with Thursday -- by around 30 million cu m/d -- due to a 4 degree Celsius swing in temperatures to the upside. That matched the fall in Langeled flows to the UK by the end of Friday.
Norwegian deliveries via Langeled opened Friday at an 18 million cu m/d flow rate, but nominations were ramped up to 40 million cu m/d later in the day, but still almost 30 million cu m/d below the rate that Langeled had been pumping to Easington earlier in the week.
Over the weekend, flows via Langeled recovered and on Monday are nominated back up at 67 million cu m/d.
With the key IUK interconnector set to be on maintenance in the last two weeks of April -- limiting the UK's ability to move surplus gas to the continent -- Norwegian flows could again be curtailed to meet demand.
"During IUK maintenance it is likely we may see such optimization again to limit downside, but it will not alleviate the structural oversupply this summer," Simon Wood, managing analyst at S&P Global Platts Analytics, said Monday.
"The drop in flows on Friday could be linked to NCS flows optimizing against demand ahead of IUK maintenance as the UK attempts to balance," Wood said.
He added that the market reaction on Friday was "over-blown," pointing to the fact that the early fall in Langeled flows on Friday to just 18 million cu m/d would be "unsustainable in our view for the Troll field."
The price reaction further down the curve may have meant traders were anticipating a prolonged period of lower Norwegian flows.
VALUE OVER VOLUME
Equinor in the past few years had reiterated it was following a "value over volume" strategy, optimizing production based on price conditions.
However, this was called into question in February when Equinor's head of marketing and trading, Tor Martin Anfinnsen, said Equinor would look to produce at full capacity across its Norwegian assets where possible and that the company was a "price taker."
"Our default is to produce flat out," Anfinnsen said at an event in London. "If anyone should turn off the taps it should not be us."
However, the Equinor spokesman in his comments to S&P Global Platts said the company "responds to the price signals in the market and seeks to route most volumes to the best paying markets at any given time."
In the past few months, Norwegian gas supplies to Germany have soared at the expense of deliveries to the UK as the NCG price enjoyed a premium over the TTF price.
Analysts at Morgan Stanley said Monday the Norwegian developments do not point to a upswing in European gas prices in the medium term.
"The European gas market remains well supplied," they said, adding: "Skeptics would...point out that fluctuations in Equinor's gas output are not completely unheard of."