At the start of October, the market barometer that is European storage levels was certainly lower than our expectations at the start of September, when we had expected a y/y gap around 5 bcm. At the start of the gas winter season, EU stock levels were down y/y by 7.0 bcm, with almost all of the deficit in the core Northwest Europe markets.
Of course, the winter gas market is all about the weather and there is currently little in the way of consensus. There are no real dominant indicators biasing forecasts, particularly for Northwest Europe. Having said that, the latest seasonal forecasts from The Weather Company put most of western Europe (including the UK and Iberia) as cooler than normal for October, but warmer than normal for November.
Staying with demand, the saga involving French nuclear power outages continued in September, with two announcements by the French nuclear regulator (ASN) promising at least another three months of high levels of outage to that fleet. The number of nuclear plants offline in Q4 17 will likely be similar y/y—maybe a couple of GW less this year, but that is it—so the markets should expect good support again for gas-fired generation.
While nuclear availability remains dented, so does hydro availability, although this is more of an issue in the southern than the northern markets. Hydro levels are critically low in Spain (with available generation down by 55% y/y), significantly lower in Italy (down by 13% y/y), moderately lower in France (down by 6% y/y), but moderately higher in the Nordics.
On the supply side, LNG remains the wildcard. While new projects globally promise more LNG supply, China has been a huge buyer this year and it is hard to discount the importance of its demand in the coming winter. We expect the northern terminals in China will aim to start the heating season with full stocks, and that inventory building has strengthened LNG prices over the last two months. In early October, cargoes into Northeast Asia are trading over 8.1 $/mmbtu, although that is for cargoes to be delivered in December. However, much will depend on winter temperatures. A relatively mild Q4 could keep Asian demand muted and would support the 2 bcm or so of incremental LNG we expect to see in Europe in November and December.
Russia, Norway and the UK could add further supply, if needed. The UK and Norway brought new fields online this year, while Russian supply is available and Gazprom is able to use more of the OPAL pipeline—at least for now. In contrast, the Netherlands and Algeria have been source of softness in European supplies, and this looks like continuing through winter. If, at least as one weather forecaster has suggested, there is a higher incidence of extreme cold spells, then the Dutch would be expected to draw on winter flexibility. November 2016, the month with the biggest temperature deviations below normal last winter, saw Groningen production come in an average 1 mcm/d higher y/y over the month.
TTF prices (prompt and M+1) have been trading at the 15 percentage point efficiency difference fuel switch trigger of 17.5 €/MWh. Further softening below this seems unlikely as the y/y storage gap still persists. We expect prices to stay around the 17.5 €/MWh trigger before the heating season really kicks in, which could then push the TTF to 19.75 €/MWh. With the expected weakness in power demand no longer holding, prices will be sensitive to weather and we expect prices will trade between those two triggers, coming in at a winter average of 18.5 €/MWh.