After being comfortable in January, the European gas market has been anything but in February and early March. A series of storms blew in very cold weather that ballooned demand and stretched the NW European markets. As a result, the European gas markets have been turned on their head—from looking long storage this summer to now needing to plug a hefty deficit.
The most recent weather forecasts point to another very cold spell before the end of March, but forecasts have been highly changeable and could well shift again before the heating season ends. Storage levels are already some 3.5 bcm lower y/y and we think another 5–6 bcm of additional draw y/y is likely over the coming three weeks. That would take EU storage levels down to 17 bcm by the end of the winter season—almost 10 bcm lower y/y.
Heavy storage draws and the extreme high prices experienced in the market over the last three weeks point to what now looks like an abject shortage of winter flexibility. Late winter can often be a stressed time, as stocks near their yearly nadir, but the sharp reductions in Groningen output and the loss of Rough seen in recent years have structurally cut short-term European flexibility.
The projected y/y deficit of gas in storage resets our expectations for the market this summer. The 10 bcm of additional LNG y/y we expect to enter the EU market will now be purely needed to refill very low stocks. We think that EU market participants will now not want to end the injection season with less gas in storage y/y—particularly after the current tight winter and given a potential further reduction to the Groningen cap. If the latter is large, there should be an even higher need for gas into storage.
The main casualty of these developments will be gas demand into the power sector. With there likely to be less demand for thermal power anyway—due to increased nuclear and hydro generation y/y— summer gas prices now look unlikely to encourage any additional demand for gas into power compared to last year. If the expected LNG does not arrive, then prices will even have to settle at a higher fuel switch trigger than last year. We can forget getting more coal-to-gas switching if that happens and instead could see y/y reductions in power sector gas demand.
All of this should support nominations of Russian gas. We have gone from being a bit bearish in the last few months to now being supportive of extra Russian takes this winter. The EU’s reliance on Russian supply will grow. However, a long-running spat between Gazprom and Naftogaz has deteriorated to the point where Gazprom is refusing to supply Ukraine (despite a prepayment) and is actively seeking to cancel both supply and transit agreements. Instead, Gazprom seems to be upping its work on bringing online TurkStream and Nord Stream 2, which would bypass Ukraine and feed European markets. Success in getting those pipes built, and more downstream infrastructure, will ultimately decide if Gazprom can avoid transiting gas through Ukraine.
Our price forecasts for 2018 have been revised upwards given changes to the summer 2018 balances. Our expectation that less gas will be available for the power sector requires a higher relative price. We now forecast that the TTF will come in at 17.5 €/MWh in Q2 18, up from our previous forecast of 15.9 €/MWh. For Q3 18, we still expect prices to slide q/q on a healthy LNG import outlook, but our forecast has been revised up by 1 €/MWh to 15.7 €/MWh compared to our last forecast. If LNG is not forthcoming in the volumes expected, then Q3 18 prices could be closer to the forecast Q2 18 prices.