Europe's 2021 gas contracts fall amid lack of bullish factors, North Stream 2

London — A lack of bullish expectations for Europe's natural gas market coupled with the expected completion of Russia's North Stream 2 pipeline led to falling values for the Summer 21 and Winter 21 contracts on European hubs and the narrowing of the Summer 20/21 and Winter 20/21 spreads.

The Dutch TTF Sum21 contract registered a sharp drop between January 13-14, moving from Eur15.75/MWh to Eur15.30/MWh overnight and continuing to fall promptly in the ensuing days, data from S&P Global Platts Analytics showed.

The Sum20 contract lost the same value between those dates, but fell less sharply from January 15 onwards, with some gains in the past few days. As a consequence, the spread between the two contracts narrowed, from Eur3.825/MWh on January13 to Eur3.525 January 27.

Likewise, the Win21 contract dropped sharply between January 13-14, moving from Eur18.25/MWh on January 13 to Eur17.85/MWh the following day and continued to drop at a faster pace than its Win20 equivalent from then onwards.

However, the premium of the Win21 contract over the Win20 equivalent started to shrink from January 20, as the start of the storage capacity season across Europe triggered heavy losses on the Win20 contract.

The trend on TTF had been witnessed across the Continent, market players said, with traders keen to sell the far curve and then cover the same period later on with cheaper contracts.

Low prices

"The thing is that people are starting to realize that this situation of very low prices is going to remain. There are good reasons to think so. Higher regas capacity in Europe, gas demand destined to reduce due to both the clear trend of milder winters and higher renewable power production. But no one wants to lose market share. And so big producers and big speculators are selling the far curve," a UK-based gas trader said.

"Players are thinking: 'You know what, [it's] better to hedge by selling the Win21 now that it's at Eur16.7/MWh than later,' because they think it's more likely to have in the future a Win21 contract at Eur12/MWh rather than at Eur20/MWh," the trader added. He expected the Sum20/Sum21 and Win20/Win21 spreads to continue to shrink.

According to another UK-based gas trader, the trend visible on the Sum21 and Win21 contracts is the same as that which had appeared on the front curve, but delayed.

"The front went down too quickly. Now the rest of the curve is catching up," he said.

"[The feeling is] that for Feb and Mar we have reached a kind of floor. The feeling is [also] that for Sum20 there is more room to go down," a German energy broker said.

But for 2021 gas contracts, the room to fall was still there, the broker added, pointing at the expected launch of North Stream 2 and a further bearish event putting pressure on the far curve.

"In 2021 also NS2 could or should be ready," he said.

While no bullish trends are appearing on the horizon, traders fear a new drop on the front curve -- potentially reverberating on the far curve -- may be triggered by increasing Russian exports to Europe via Ukraine in the next few days.

"The wild card remains the Velke interconnection point, the Russians could open the valve at any day," he added.