A mild March and warm start to April have helped to shrink the y/y storage gap in Europe, reducing it to less than 8 bcm, which is 5 bcm lower than we expected it to be at the start of last month. As a result, gas prices eased further through March, with the D+1 contracts at both the NBP and TTF hubs falling by around 12% m/m.
Even if April weather returns to the seasonal average, the fact we are now in spring means that the impact on heating demand will be more modest than during a winter month. This will not significantly tighten the market, as it is unlikely to do much more than slow the rate of injections.
Summer supply still looks up to the challenge of filling the remaining storage gap, although some uncertainty remains on the supply side. Norway can potentially add up to 3 bcm of supply y/y due to its very light summer maintenance schedule. UK gas production keeps ticking up, as do North African exports, buoyed by new fields and the base effects of the third In Amenas train.
Russian supply has been strong so far this year, and following a dip in March due to weaker demand, early indications are that flows in April will be buoyant. Russian flows should be watched closely, as most of its European supply contracts now have some degree of hub price exposure, which should give customers an incentive to nominate from Gazprom to fill storage. The exact nature of that hub exposure will be important in determining exactly how much supply we see, but we are expecting around 1.4 bcm more Russian gas y/y this summer.
LNG supply remains the most uncertain, as it is subject to the whims of project delays, outages and weather patterns in Asia. Still, the evidence is that LNG is already starting to come back to Europe in stronger volumes, and this will play a 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. We expect to see LNG receipts higher y/y by 7 bcm in Q2 17 and 9 bcm in Q3 17. Another hot Asian summer would see fewer cargoes left for Europe, but incremental European receipts should still be chunky as the US-Asian arb window is already closed and North American LNG exports will need to find a home.
Gas demand from the power sector should stay buoyant this summer, with French nuclear outages still high (over 13 GW) and hydro levels around Europe all lower in y/y terms due to the high spilling seen over the peak winter months. With gas pricing more competitive against coal, the power sector could add up to 8 bcm of additional gas demand y/y over the coming summer.
The level of summer injections at the UK’s Rough storage facility has now been set to zero, with CSL dashing hopes that injection would restart on 1 July. The result is now that the UK should now stay at net exports over Q2 17 and over Q3 17. This certainly has implications for the NBP-TTF spread over the summer, with hefty NBP discounts to the TTF now expected to persist across the two quarters. We expect the largest NBP discount to come in June, when the UK also sees its exports to Zeebrugge interrupted by IUK maintenance. The NBP summer-winter spreads should also widen, with the NBP premium to the TTF now needing to be higher over the following winter.
We maintain our price forecasts that this summer’s global gas prices (NBP/TTF and Asian spot) will converge around 15 €/MWh, or 5 $/mmbtu. Given the recent strength in Henry Hub, any further reductions could even close the US export arb to Europe.