Morgan Stanley attempts to forecast European gas balances without Russian supply

Apr. 12, 2022 11:50 AM ETCEIX, BTU, WHITF, TELL, LNG, NRT, VET, EQNR, SHEL, XOMBy: SA News Team53 Comments

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Morgan Stanley is the first bank to make an attempt at forecasting European natural gas balances without supplies of Russian fuel. The bank believes that a combination of demand destruction and increased LNG imports will be required to balance markets. Noting that prices for gas in Europe are likely to stay higher for longer than futures markets are currently forecasting.

On Morgan Stanley's numbers, Europe consumed 484 billion cubic meters "bcm" of natural gas in 2021, with a full 31%, or 149bcm, coming from Russia via pipeline and LNG. By 2025, the bank sees demand for gas in Europe falling 10% and LNG imports rising 43%, or ~54bcm. To incentivize LNG imports, Morgan Stanley forecasts ~$30 gas in 2022, ~$25 in 2023 and ~$20 gas in 2024.

The analyst highlights that north Africa and "other" pipe imports, currently meeting 27% of European demand, are set to decline in coming years. Furthermore, Morgan Stanley sees continued declines in domestic production, as the Netherlands moves to shut Europe's largest gas field in 2023. Norwegian gas supplies are expected to grow through 2025 (EQNR).

A point of debate with the note could revolve around the LNG import forecast. The unfortunate fact is that the forecast calls for 54bcm of increased LNG supplies by 2025; more than 100% of global production growth. Suggesting the price forecast is an estimate of the price at which contracted Asian buyers would resell LNG to Europe. In practice, this would mean Asian buyers would purchase LNG at a crude-linked, contract price (currently ~$10-15/mmbtu), resell the gas to Europe at a profit, and substitute coal for power generation.

The note excludes any mention of the impact on coal, though Monday European clean-energy heavyweight Orsted acknowledged the need to increase coal consumption. If Europe pulls natural gas and coal out of Asia, it could exacerbate the ongoing thermal coal shortage. Resulting in thermal coal prices trading towards "energy parity" with LNG prices in Asia. One ton of Newcastle thermal coal contains ~26mmbtu of energy, suggesting $20 LNG prices could lift the ceiling on thermal coal prices to over $500/t.

Forecasting European energy balances without the benefit of Europe's largest energy supplier is an unenviable task. The note highlights there are no easy solution, and flags wide variability around base-case price forecasts. If Europe in fact moves to dramatically reduce Russian gas supplies, a number of domestic producers would benefit, including Shell (SHEL), Exxon (XOM), Vermillion (VET) and NRT (NRT). Additionally, LNG suppliers like Cheniere (LNG) and Tellurian (TELL) could see an economic tailwind. However, sustained triple-digit thermal coal prices would likely see companies like Whitehaven (OTCPK:WHITF), Peabody (BTU), CONSOL (CEIX) and others outperform gas names in coming years.

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