Fundamentals

Published at 11:17 14 Mar 2017 by . Last edited 12:20 14 Mar 2017.

After a cold start to the year, temperatures flipped above normal in February, which put a dent in European gas demand. Still, despite weaker residential and commercial demand, power sector demand remained strong in many countries, which helped to partially offset the declines in aggregate demand.

Such was the case in France, where power sector demand remained supported in the face of continued outages in the EDF nuclear fleet. Indeed, even as France experienced its warmest February since at least 2008, gas demand from ‘other’ sectors soared by 0.29 bcm (128%) y/y to 0.51 bcm, suggesting much higher power sector gas demand in the face of the outages. This strong performance helped to limit the total decline in demand to only 40 mcm (-1%) y/y.

In the Netherlands, the story was similar. Even as residential and commercial demand dipped, power sector gas demand continued to grow y/y, up by 5% to 1.49 bcm. This was even as a brief price spike in early February would have left most CCGTs out of merit. In Belgium, power sector demand was still up by 25% y/y despite contracting by 0.12 bcm m/m. Still, strong takes from power generators were not enough to keep total demand from falling by 2% y/y over the month to 1.7 bcm.

Mild winter weather also crimped UK demand, which retreated by 4% y/y to 7.64 bcm. LDZ demand was the weakest since at least February 2009 on account of the warm weather. LNG sendout was pitiful, down by over 80% y/y as arb economics favoured Qatari cargoes in Asia over Europe. Despite all this, imports from Norway and Belgium still posted y/y increases, as frequent outages at the Rough storage facility constrained withdrawal capacity and NBP prompt prices retained a premium to continental equivalents. Given that Rough will be unavailable for injections until at least 1 July, and that we expect more LNG to begin arriving in Europe from Q2 17 onwards, we anticipate that the UK will need to export more gas to continental Europe and import less from Norway for the market to balance.

In the southern markets, meanwhile, gas demand was mixed, with Spain recording a small y/y increase of 0.8 % and Italy recording a much healthier 8% y/y. Italian residential demand rose y/y as temperatures were colder than last year. Power sector gas demand in both countries experienced healthy increases—up by 3.5% y/y to 0.31 bcm in Spain and by an impressive 20% y/y to 2.2 bcm in Italy. In terms of supplies, Algerian flows into both countries remained strong in February, coming at the expense of Russian flows into Italy and French flows into Spain.

In Central Eastern Europe, implied demand was higher y/y in Hungary, Slovakia, and the Czech Republic last month. The higher implied demand owed to an exceptionally mild February 2016, despite mild weather this year cutting HDDs in Central Europe to about 5% below the five-year average. Still, higher temperatures compared to January helped weigh on Central European near-curve contracts last month, despite slower m/m Russian exports owing to a sharp drop in Nord Stream deliveries.

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