Early spring

Published at 15:04 13 Mar 2017 by . Last edited 16:23 13 Mar 2017.

After the cold January that drove a sharp draw on storage, a milder February helped keep the y/y storage gap steady and even held out the promise that at the end of winter that gap might actually be smaller than expected at the start of the month. As a result, gas prices eased through February, with the D+1 contracts at both the NBP and TTF hubs falling by 20% m/m.

How long the current mild spell lasts is a key consideration. Short-term forecasts still suggest warmer weather until mid-month, after which temperatures cool towards the seasonal norm. With two weeks of above-normal and two weeks of normal weather, we could see something like a 5 bcm draw, which would narrow the y/y storage gap to around 12–13 bcm at month-end. 

Summer supply is looking up to the challenge of filling that storage, with Norway adding up to 3 bcm of supply y/y due to the very light summer maintenance schedule. UK gas production keeps ticking up, while Dutch gas output is in decline. Russian supply has been strong so far this year, and given the high share of production that now appears to be hub-indexed, customers will retain the incentive to nominate from Gazprom in order to fill storage inventories. We are expecting around 2 bcm more Russian gas y/y this summer.

LNG supply will also play the key role in plugging the storage gap and allowing more gas into the power market. Q2 17 should begin to see LNG flows into Europe rise y/y as the heating season ends and Northeast Asian demand seasonally ebbs. The risks around project delays seem less pronounced this summer, and we expect to see each summer quarter receive around 8.5 bcm more LNG y/y. Incremental arrivals in Q3 17 appear the most at risk, given that the quarter’s volumes include those from trains that look more like being delayed (Wheatstone Train 1, Ichthys Train 1), and as another hot Asian summer would see fewer cargoes left for Europe.

Another uncertainty is over the fate of the UK Rough storage facility and how much capacity will be available this summer. CSL’s big end-February news that injection services at Rough may not be available until July at the very least, had implications for the NBP-TTF spread. However, given a 1 July injection start, and at least 16 operating wells, UK gas storage inventories could rise to between 2.8 bcm and 3.5 bcm come the start of October, which is better than at the start of last winter, when they peaked at 2.56 bcm (see Europe Insight: Rough Guide, 7 March 2017).

The warmer outlook for Europe for the first half of March has lowered storage concerns and allowed a consequent softening of gas prices. Barring temperatures dropping a long way in the rest of March, we expect to see the market (prompt and M+1) continue to trade around the current fuel switch trigger of 16 €/MWh. Eventually, we see further softening for the summer contracts towards the next fuel switch trigger of 15.0 €/MWh. With Northeast Asia needing to trend down below 15.5 €/MWh (5.5 $/mmbtu) to close its arb window with the US, this suggests global gas prices converging around 15 €/MWh, which is just under 5 $/mmbtu, this summer.

Given the potential lack of Rough injections, the NBP could trade at a discount to the TTF of around 2-3 p/therm, compared to its premium in Q2 16. That discount will be narrower in Q3 17, provided Rough comes back with at least 16 wells to support injection. Certainly, over July and August, that discount could flip to a premium as the UK will need to go into maximum injection mode. September is the exception in Q3 17, as the planned 20-day maintenance at Rough will again see that spread need to stay negative.

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