Euro gas illiquidity worsens as security between shippers grows

Strong points

Suppliers requesting larger down payments, guarantees from the parent company

Credit problems already abound in the market from exchanges, brokers and TSOs

Long-term rally stagnates as injections, buying slow

Liquidity concerns for players in the European wholesale gas market worsen, sources told S&P Global Platts, as credit lines crumble between shippers, suppliers and buyers under contractual agreements long-term.

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Already facing higher demands for trading and ensuring imbalance from exchanges, brokers and networks in a context of very high energy prices in Europe, over-the-counter (OTC) trading supported by such deals are now also feeling the pressure, as sellers in particular are now seeking greater security from their buyers for forward purchases.

These additional collateral requirements exacerbate already stretched lines of credit, which has dramatically reduced the amount of trading capital that companies can free up for purchasing derivatives to protect against future volatility and potential price spikes as they grow. as winter advances.

“This has typically manifested itself with suppliers asking customers for security deposits or parent company guarantees (PCGs) to cover the additional credit risk associated with the value of their contract based on current prices,” he said. said a UK gas and power portfolio manager. Platts said.

“For our customers, this would limit forward purchases more than limit use,” they added.

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

“For me the cash flow situation is a big problem,” a German utility trader told Platts. “You need a lot of money for all of those margin calls.”

“Cash is a daily thing, every day you have margin calls with the stock markets and [commercial] counterparts [for] the effective settlement of over-the-counter transactions. “

The utility trader also referred to PCGs and how these can act as a secure guarantor for the purchasing activity of a subsidiary, but not for credit in the traditional sense.

“If your deal is tied to a PCG, it could be okay,” the utility trader said, “but by the settlement date you really have to find the money… then a collateral is not enough: where is real money? “

“[What if it] turns out that the parent company cannot raise the funds for the actual settlement? ”said the trader.

The UK portfolio manager acknowledged that buyers would effectively have no choice but to meet additional short-term security requirements, although in the interest of maintaining a long-term deal, flexibility to inside or outside of these agreements could be granted by the supplier.

“There can often be discussions between the customer and the supplier about how to alleviate their credit problems without having to put up a huge security deposit,” they said.

Credit at maturity

The record rise in wholesale natural gas prices in Europe in 2021 was mainly caused by a rush to quickly inject scarce volumes and to cover winter contracts in what is expected to be an extremely tight heating season.

All the efforts of European shippers seem to have been deployed in this direction in a very difficult context, despite the rise in prices limiting their ability to do so.

Analysis of Platts’ price data indicates that the rally itself may finally run out of steam, with the market valuation at the Oct. 22 close for the first month’s delivery of 219 pence / therm pushing its moving average down by 15 days on the day of the first time in two months.

“He doesn’t want to reach new heights just yet,” the portfolio manager said. “He had the opportunity with Gazprom not to book additional capacity through Ukraine this month, but after the initial push, he had already weakened by the end of the day. He was the catalyst for the day. most other months. “

The fact that the price increase could not be sustained beyond the immediate fallout of the auction could reflect a lack of buying support during the winter months, if these future delivery periods were adequately covered. for physical consumption.

However, since credit problems are already compromising a shipper’s ability to make new purchases for winter peaks in demand, unused storage capacity in Europe is now also likely to be deprived of new critical volumes before the end of the year. winter, which now appears to be a lower priority as increasing demand undermines the rapid availability for this purpose.

“If you need the money, you don’t want to inject either,” the utility trader said.

On the rise

As the long-term trend stabilizes, intraday volatility in October has always been above anything previously seen in the wholesale market, with daily, if not hourly, movements now being seen above. historical daily increments. This volatility remains a subject of debate in the industry, although it is also starting to ease slightly.

“We know we’re in trouble for this winter, so we’re overreacting to every news,” the utilities trader said.

“As for the upside, I think the driving factors are about the same as they have been for much of the year,” the portfolio manager said, referring to previous comments. “On the other hand, I think the increase in wind generation, the destruction of industrial demand, the increase in Norwegian flows and Japan reaching comfortable storage levels are factors.”

For much of the summer, however, Europe found volume to inject, with most of the deficit between this year’s storage level and the previous deficit in 2018 being the lack of Russian stock within their European capacity. The pan-European inventory on September 30 was 6.097 billion cubic meters lower in 2021 than it was in 2018, according to data from Gas Infrastructure Europe, with the Germans Rehden and Haidach GSA in Austria alone accounting for 5.148 billion meters. cubes of this difference.

Exchange trading volumes are also healthy and close to normal, leading participants to question whether volatility is justified or not, and who may be to blame if physical liquidity is an issue.

“Physically we are still doing well, the volume traded on the TTF curve is also okay, but the next settlement dates on the 20th of the month will be interesting,” the utilities trader said.

“May be [there is] nervousness that prices are going to be at these levels … some people will make a lot of money, “the portfolio manager said.



Injection cost (Eur / MWh)

Injected volume (Bcm)

Average Winter 2021 Front Price (Eur / MWh)

Profitable withdrawal volume

Q1 average 22 Jul-Sep (Eur / MWh)

Profitable withdrawal volume

Front Quarter reports on October 18 (Eur / MWh)

Profitable withdrawal volume

Monthly injection stocks net of profitable withdrawals

Source: S&P Global Platts

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