2018 starts in the aftermath of a mild but action-packed December, including a three-week outage at the Forties Pipeline System (FPS) that tightened the UK market and an explosion at Baumgarten that led to the shortest-lived gas supply ‘emergency’ we can remember. A mild start to January helped NBP and TTF prices to decline from December highs. A number of key price drivers are looking like they are easing, particularly on power. French nuclear plant availability and southern European hydro stocks are rising (with the exception of Spain). However, some high gas prices around the world are helping to keep LNG sendout modest.
Starting 2018, we are still bullish LNG supply for Europe, as un-risked volumes suggest 15 Mtpa of additional LNG to arrive. However, given that those numbers rely upon some 30 Mtpa of new projects coming online this year as scheduled, delays similar to those seen last year could reduce global LNG availability by around 5 Mtpa. Arrivals into Europe of 10-12 Mtpa or so are more likely, though there is of course demand risk from other non-EU LNG buyers, particularly those in Asia.
In terms of production and exports of pipeline gas to Europe, 2017 was a record year (at least for this decade) for both Norway and Russia. The Norwegians ended the year exporting an impressive 7.6 bcm (7%) more y/y in 2017, at 115 bcm, though much of this rise was due to lower maintenance levels. Norway now looks like it is going to provide similar volumes this year, with new compressors at Ormen Lange and Aasta Hansteen expected to put first gas into the market in 2018, and as summer maintenance levels announced last month were again low.
Russia supplied a record 15 bcm (11%) more y/y at 162 bcm, helping to finally monetise a bigger share of its available capacity at Bovanenkovo. Gazprom benefitted from a number of factors including the still high production capacity on the Yamal peninsula, the move to greater hub-indexed pricing in its supply contracts, and greater access to the OPAL pipeline from August onwards. Russia has a full year of OPAL access in 2018, but Russian flows will depend on how much European gas demand materialises, which will be a function of weather and LNG imports.
On the demand side, 2018 could see some degree of normalisation of hydro levels and French nuclear availability. This would weigh on the need for thermal plants, meaning even more fuel switching from coal to gas will be needed if gas demand is to help keep up with supply. Just do not look to Bitcoin mining to help rescue European power and gas demand—the region’s energy is too expensive to host any material level of cryptocurrency mining.
We do not expect February-March TTF prices to move outside of the 18.3-20.6 €/MWh range currently set by the fuel switch triggers. Weather forecasts will determine if they tend towards the top or bottom of that range, although March will have a bias towards the bottom if temperatures stay seasonally normal or milder than normal.
The Sum-18–Sum-19 spread will be worth keeping an eye on. The spread left its unexpected contango shape behind to enter backwardation, starting January trading around -0.7 €/MWh. We think that spread can widen further and forecast it to outturn at -1.4 €/MWh.