A very warm October has left EU gas stocks at the start of November at 88.2 bcm, only 3.2 bcm down y/y. This level of storage fullness leaves little reason for supply concern this winter under most weather scenarios. Most of the y/y gap was in France (down by 2.0 bcm y/y). An additional 1.2 bcm shortfall was largely due to a reclassification of allowable working gas volumes at the Dutch Norg facility.
Of course, the winter gas market is all about the weather and a shift in the two-week weather forecasts for a more sustained period of colder-than-normal temperatures has started to shift the European market upwards. Having said that, temperatures are still much above peak heating temperatures and this suggests that the market still has upside from the mid-19 €/MWh level it was finding in the first two weeks of November.
Gas demand does remain supported by a seemingly never-ending saga involving French nuclear power outages. The series of announcements over the last month by EDF and the French nuclear regulator (ASN) about widespread corroded piping that needs replacement has meant that few reactors came back in October and the level of outage we expect for November and December is unlikely to be any lower y/y. On top of that, a very warm and dry October in Iberia meant no respite for Spain’s highly depleted hydro facilities. which has led the country to build up LNG stocks to get through the winter.
On the supply side, Europe has plenty of flexibility. While LNG remains the wildcard, any shortfall in LNG supplies will be made up by recourse to Russian and Algerian volumes. We still see very little incremental LNG coming to the EU market in Q4 17. We recognise that the global gas price arbs support spot LNG going to NE Asia, and that will encourage reloading of cargoes from the EU. We have seen reloading in the last month from NW European terminals, but expect this will be much more limited from the southern markets, with Iberian power looking very tight for the remainder of the winter season. What LNG will be available for Europe, will head to the southern markets first.
The real supply flexibility is going to come from Algeria and Russia, even though Norway and the UK could add some further supply this winter on the back of field additions over 2017. Algerian gas has fallen out of favour over the last six months, as European hub prices softened over the summer, pushing Algerian oil-indexed pricing largely out of the money. However, with Asian LNG prices so strong and Spanish spot prices still high (although illiquid), the call on Algerian gas rebounded in October and should stay greater over the coming winter than it was over the summer. Next summer, Algeria will again struggle to get nominations for its gas without moving its pricing to some form of hub index.
Russian supply is available and with Gazprom now able to use more of the OPAL, that pipeline and storage will be key levers for market balance. If colder-than-normal weather persists over the coming three months, we expect TTF prices to head up towards the 20% fuel switch trigger, which is currently pricing at 21 €/MWh. A milder-than-normal three months will see the market ease, regardless of LNG supply, and prices could slip back to the 15% trigger at 18.7 €/MWh. A more normal winter and the market is likely to move between these two extreme levels. With normal weather winter, end-of-March storage could wind up 20 bcm or so higher y/y, which would pave the way for spot prices next summer prices to be much lower than the curve currently suggests.