This is the final edition of Europe Outlook for the year. Normal service will resume on January 2018 but we will publish the much awaited annual prize crossword separately next week. Winners will be announced in 'Published this week' on 5 January 2018. Happy holidays!
Although November was cold, it was milder y/y, so EU gas stocks at the start of December were at similar levels y/y. Many of the market’s current drivers were around last year—French nuclear outages, low hydro stocks, lower Dutch production, and modest LNG sendout. A cold start to December combined with some high-profile outages led to a jump in TTF prices, but the hub remains within the 20-22 €/MWh range, with some resistance to prices staying at levels outside of that band.
This month we look back at 2017 and review some key themes. One theme was that while incremental LNG volumes arrived in NW Europe, it was not a supply tsunami. Despite a weak Q4 17 for LNG supply, and a year of record Chinese gas demand increases, the EU saw LNG sendout rise by 5.31 bcm (14%) y/y over the first 11 months of the year.
With the US having four producing trains, and a fifth one starting to produce LNG, we still have not seen that much in the way of convergence between Henry Hub and the TTF/NBP. In fact, there was a situation over the summer where the TTF was in contango while the Henry Hub (and Cif ARA) curves were in backwardation for the Y+1 summer contracts. This pointed to a misalignment between EU gas prices and the prices of a key marginal source of supply and competing fuels. By December, that anomaly had finally been priced out.
The loss of the UK’s Rough storage facility resulted, as expected, in wider NBP spreads to the TTF encouraging changes in gas flows to facilitate the UK balance. The widening premiums had two main effects—one was the increasing use of the IUK pipeline, with higher flows from the UK to the continent in the summer and higher levels of UK imports from the continent in the winter, and the second was to encourage Norwegian gas to be increasingly diverted towards the UK in winter, and then away from the UK in summer. Additionally, continental pipeline exports often at capacity led Norway to use the UK as a route to the continental market.
On pipeline flows, it has been a good year for most of the big pipeline exporters, with Norway producing an impressive 7.5 bcm (8.5%) more y/y in the first 11 months of 2017. Not to be outdone, Russia supplied 13.5 bcm (11%) more y/y over the period, reflecting that Gazprom has moved more to hub-indexation pricing in most contracts. Even the UK got in on the additions, although Dutch gas production dropped by 8.3 bcm y/y, with Groningen down by 3.5 bcm y/y and steep reductions in small fields responsible for the rest. Algerian imports to Europe were more modestly down, by around 1 bcm (3%), over the first 11 months of the year as a lack of hub-indexation in its contracts made its gas uncompetitive.
Nothing may have been quite as frustrating for the market as the frequent revisions to scheduled nuclear outages in France. Despite some testing moments, the experience of such lengthy and large outages in the French nuclear fleet has been manageable. All of that lost nuclear generation has been combined with low hydro stocks, particularly across southern Europe.
Over the remainder of December, prices could start to move further upwards if the two-week weather forecasts start indicating a more consistently cold month. If that happens, 21 €/MWh at the TTF will be breached again. If temperatures are broadly seasonally normal, then we expect that prices will stay supported in that half-way house—not enough tightness to get it to 22 €/MWh and not enough softness to support a repricing downwards past 20 €/MWh.