European gas markets are struggling to balance between short-term oversupply and a number of possible supply risks, Swiss trading firm MET International's chief executive, Gyorgy Vargha, told Argus.
Source: Argus
"European gas markets are struggling between this sense of short-term oversupply if nothing adverse happens, and a number of risk events and trying to price these risks," which is "extremely difficult" according to the chief executive.
Earlier this month the narrative was evolving around oversupply, but this has changed in light of news around the Balticconnector pipeline, taken off line on the morning of 8 October, fears about Egyptian LNG exports, Bulgarian transit risks and cold weather, which pushed up prices substantially, Vargha said.
All these events highlighted there are enormous risks threatening European security of supply if pipeline supplies to the continent are further reduced, even with demand from the industrial and residential sectors holding below average, the chief executive said.
"Europe is still very much dependent on individual country pipeline gas supplies," Vargha said, adding some events pose no direct challenge to Europe's supply but rather to the global market, with Europe now an integrated part of this.
The chief executive expects Europe's gas supply to be secure even in a cold winter scenario, in the absence of extreme events.
More supply commitment needed
There is a need in Europe for more longer-term supply contracts but this could be "difficult" for individual private firms on a standalone basis, Vargha said.
"Suppliers will commit to hedge European consumption if customers are also interested in committing to long-term procurement positions, at least for a certain percentage of their consumption, for the sake of supply security," Vargha said. It is a "two-way street" and there has to be a risk balance between suppliers and buyers, he added.
The buyer ultimately carries the risk if it fails to secure at least part of its future consumption and hedge itself against high gas price events, and if it does, it is just prudent risk management not to be over-exposed to spot markets, Vargha said. Suppliers can support individual partners with structuring and optimising their cross-commodity risk portfolio on a long-term basis, according to the chief executive.
Suppliers with physical options like storage or regasification capacities can do "well" in periods of high volatility, as can firms that committed to long-term LNG supply contracts in a high price scenario, he said.
MET recently signed a preliminary agreement to buy 1mn t/yr on a 20-year term from the US' planned 9.3mn t/yr Commonwealth LNG export terminal.
MET's competitive advantage in the gas markets is its "extremely wide coverage" of activity in Europe, according to Vargha. This has provided flexibility to optimise operations in different locations depending on domestic supply and demand requirements, he said.
And a new office in Singapore will help the company to leverage its position in Europe, making it potentially more competitive on a global scale as well, Vargha said.