Please note that we will not publish an August edition of European Outlook. The monthly schedule will resume as normal in September.
June saw some very hot weather in southern Europe, and patches of heat in the north too, with gas demand reacting positively. Gas also received a boost in relative price terms in the power sector as coal prices rose and as low hydro levels persisted in the south. Despite this myriad of demand-side supports, prices were still softer m/m, with the TTF dropping about 3% m/m.
July has started the way June ended, with hot weather everywhere but the hydro shortfall helping to make the south the tightest of Europe’s gas hubs. This tightness means that the Spanish market is very likely to trade at a premium to its European neighbours, making it the primary target for incremental LNG imports. At the rate of receipts seen in June, Spain would take 2.5 bcm more LNG y/y over Q3 17, which is almost 50% of the 5.7 bcm of incremental LNG we expect to arrive in the EU over the quarter. The rest will be spread across the other importers, leaving the Northwest European market only taking some of the residual.
One clear bull story for the rest of the summer is storage, with 1 July inventories still 10 bcm lower y/y. While large, that shortfall is based on a year that ended with a historically high inventory level and follows a long and quite cold winter when 65 bcm of gas was withdrawn. With inventories at 51 bcm at start of month, injections over Q3 at June’s levels would put 1 October storage levels at 81 bcm, some 11 bcm lower y/y.
French nuclear outages also remain supportive of gas demand, with June characterised by frequent outage extensions and the average offline nuclear capacity at more than 22 GW, which is 6-7 GW higher than in June 2016. The EU gas markets are getting a taste of what life will be like without a great deal of French nuclear baseload. Shortly after our report on the coming decline in nuclear capacity (Insight: Nuclear’s winter, July 2017), the French government confirmed that some 17 reactors might need to be closed by 2025.
The last of the obvious gas support comes from the recent surge in coal prices. As usual with the coal market, the root of the excitement is in China, where a very wet period, usually a boon to hydro, has been so severe that the major hydro dams are not being allowed to generate, as doing so would exacerbate the downstream flooding. This coal price move is somewhat transitory, and we expect that in the coming weeks, when the flooding subsides, coal prices will fall back with the water levels, leaving China with high hydro levels and reduced support for gas prices.
Despite all that support, the market looks soft given supply additions coming from Norwegian and Russian pipelines as well as LNG. Norway is benefiting from a historically light round of maintenance, with works in July and August lower by 2 bcm y/y. In Q4 17, UK supply is also going to be augmented, with almost 1 bcm of gas expected to be sold from Rough as part of the process of permanently closing the storage facility. On the flipside, the Netherlands and Algeria have been source of softness in European supplies which looks like continuing over the coming months.
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 global arbs with Henry Hub should remain open all year, with the latter remaining just below 3.0 $/mmbtu. With some softness in the prompt, timespreads have generally widened, and some look like they need to narrow given the developments we expect in the fundamentals.