European storage levels remain lower y/y with a cold end to April slowing injections as the heating season had one last hurrah. That cold has extended to the first week of May, and has widened the y/y storage gap back out to almost 8 bcm. This leaves the European market with some work to do—in total 66 bcm will need to be injected to get to last year’s 92 bcm in storage by 1 October. With early May inventories down at 32 bcm, there is still a long way to go. The y/y storage gap is unlikely to narrow significantly over the coming months.
In a surprising move, the Dutch government cut the 2017-18 Groningen cap to 21.6 bcm last month. Though this is not that big a deal for the overall European gas market, particularly as it will receive more LNG supplies (eventually), it has bigger implications for the localised L-gas market that relies on Groningen production. In particular, the move is driving much higher use of nitrogen injection and is helping to reduce L-gas inventories (see Insight: L-gas markets: Goodbye Groningen, 12 May 2017). More broadly, the cut to the Groningen cap means that the overall European gas market needs to find another 1.5 bcm of gas this summer, and 1.2 bcm more next winter. This comes at the same time as small Dutch fields have been in constant decline.
Aside from the Netherlands, European supply has been good, with both Norway and Russia using their flex to boost volumes and help meet the demand driven by the colder weather seen in the second half of April. Norwegian flows are also being helped by very low summer maintenance, which allows for strong y/y growth, and although not all of the potential upside was utilised in April, enough was used to help the market to balance. May should be the only month of the coming summer season not to see y/y gains in Norwegian production, while in other summer months Norwegian gas will move into the space increasingly being vacated by Dutch gas.
LNG is quickly becoming the supply source that keeps disappointing for Europe. Again, earlier forecasts pointed to a healthy volume of LNG heading for the region, with heavy incremental demand in Europe combined with muted Asian demand expected to support LNG receipts. While volumes are returning to y/y parity, the further uptick has failed to materialise.
There are a few reasons for the underwhelming LNG arrivals. China is buying more LNG and reducing cheaper pipeline imports, South Korea is stocking up in order to avoid being caught short this summer, while Japan remains sluggish in restarting its nuclear units. Add in some stop-start issues with Gorgon and delays to trains and LNG supplies have been lower than anticipated. Our forecasts still point to 13 bcm more LNG this summer—3 bcm in Q2 17 and 10 bcm in Q3 17.
The relative competitiveness of gas against coal has not significantly shifted over April, as both coal and carbon prices softened. TTF prices (prompt and M+1) are now trading between the fuel switch triggers of 16.3 €/MWh and 14.4 €/MWh. A movement all the way down to that lower level will only happen when there is greater evidence that the long-promised LNG wave is returning to Europe, so this cannot be ruled out for Q3 17, though it remains at risk.
We maintain our forecast that this summer’s global gas prices (NBP/TTF and Asian spot) will converge around 15 €/MWh, or 5 $/mmbtu, the arbs should remain open all year with Henry Hub prices looking a bit more stable with some potential downside.