Our last outlook, Summer softness, July/August 2017, marvelled at the weakness of the European gas markets, seemingly resistant to a number of supportive drivers such as hot weather in early summer, rising coal prices and low hydro levels in southern Europe. Fast forward almost two months and the European gas market looks an awful lot different, with TTF prompt prices 10% higher than at the start of July.
The big change in the market was a sudden increase in the appetite for injecting gas into storage. Over the month, the EU-wide y/y storage gap narrowed by some 3 bcm, as the German and Baumgarten storage facilities both saw big jumps in injection rates.
For September, injections could continue as the y/y storage gap is still around 7.5 bcm (although this gap is down to 6.5 bcm when accounting for the sale of Rough cushion gas) as of early September, and the appetite for injection has yet to show much inclination to ease. These storage injections should keep the market from softening too much and could result in storage inventories starting October at around 87 bcm, down from last year’s 91.5 bcm.
The coming winter story is all about demand. The seasonal forecasts have been jumpy and there is little consensus on whether temperatures will be colder or warmer than the seasonal norm. Most of the forecasts we have seen, but by no means all, seem biased towards either normal or cooler-than-normal temperatures in NW Europe. Still, mean-reverting assumptions for Q4 17 would mean residential and commercial demand will be lower y/y, while power sector demand could also ease on both milder temperatures and on improved French nuclear generation.
On the supply side, LNG remains the biggest wildcard. In terms of the global balances, two new trains are going to be online for Q4 17 (4.4 Mtpa Wheatstone Train 1 and the 4.5 Mtpa Sabine Pass Train 4), on top of the trains that started up earlier in the year. While this promises more LNG supply for Europe, around 5 bcm y/y in Q4 17, China has been a huge buyer this year, and we think that a cold winter in China could see the country’s northern import terminals snap up almost all of the incremental volumes we expect for Europe. The level of incremental volumes expected to arrive in Europe increases in Q1 18 due to new terminals, making it more likely more volumes will actually be delivered to the continent.
The UK and Norway should be adding supply, given the fields that the two countries have brought online this year, while Russian supply is available and has more of the OPAL pipeline to use, at least for now. All three of these suppliers could be adding further supply if needed. In contrast, the Netherlands and Algeria have been source of softness in European supplies, and this looks like continuing over the coming months and through winter.
TTF Prices (prompt and M+1) are now trading at the 15 percentage point efficiency difference fuel switch trigger of 17.1 €/MWh. Further softening below this seems unlikely given that the storage gap will persist into October. For Q4 17, assuming that weather remains seasonally normal, we expect prices to stay around the 17.1 €/MWh trigger. A real bout of cold push the TTF to 19.25 €/MWh, but it would need to be a sustained spell of well below normal temperatures across the markets. December should see more LNG, but there is weather risk to the upside, which could see prices move towards that higher trigger, although the potential y/y weakness in power (due to better nuclear power supply) is likely to be a headwind to much movement above 18 €/MWh.