Sail away

Published at 13:43 15 Jun 2018 by

The TTF M+1 contract has remained well supported over the last month. The contract was largely driven upwards by the strength in coal and carbon prices, which has kept upward pressure on the fuel switch triggers and that has helped the summer TTF contracts head above 22 €/MWh.

The sharp fall in European gas stocks seen in April slowed in May, with the y/y storage gap being cut by around 2 bcm, to just over 3 bcm at the start of June. That said, the storage gap actually widened back out to 3.6 bcm y/y by 10 June. We forecast that NW Europe will inject only 5.6 bcm in June as a whole, which will leave the EU storage gap at around 3.1 bcm by month-end. 

Groningen production continues to ease, and with four months left in the 2017-18 gas year output is already down by 2.5 bcm y/y—more than the required reduction to meet the current gas year cap. We think Dutch production is going to ease over Q3 18 as the Dutch government put out a statement in June suggesting that it might further accelerate the reductions in production from Groningen from 2020. We think cuts of the scale proposed, reducing Groningen to around 5 bcm by 2023, will be hard to deliver. More immediately, the setting of the 2018-19 Groningen cap seems delayed until mid-November. We expect the cap to be set around 19.5 bcm, down by 2.1 bcm y/y.

Since our last Outlook, the long-running anti-trust case between Russia and the EU was finally settled, and without any financial charges levied on Gazprom. Instead, Gazprom agreed to a number of undertakings that will fully remove any remaining destination clauses in supply contracts and allow all customers to receive gas-hub indexation in supply contracts. We think this makes Nord Stream 2 now very likely to go ahead. We also think Russian flows into Europe this summer will be buoyant, adding another 2 bcm or so to last year’s already high level. 

Promised incremental LNG deliveries to Europe are again failing to materialise. May exemplified the two main causes that have dampened supply to Europe. Firstly, there have been delays to new supply starting up. None of the three Australian trains we expected to be ramping up and producing LNG in Q2 18 actually started. Secondly, the demand side has been strong, led by stellar imports from China, which is on track for another 13-14 Mtpa incremental take this year. With JKM-TTF spreads trading in the last month at levels that suggest all spot cargoes should sail to Asia rather than Europe, expectations for significant incremental imports of LNG to Europe this summer seem wide of the mark. We now only expect 1 bcm of incremental imports over all of Q3 18—down from our previous 5 bcm expectation. 

Strength in coal and carbon prices has pushed the fuel switch triggers higher m/m by over 14%. In comparison, the TTF Jul-18 prices only added around 8% m/m, with prices going from trading in the middle of two key fuel switch triggers, to now trading just below the lower trigger. That lower trigger sits at 22.2 €/MWh on the 12 June. Last summer, prices spent a sustained period trading just below that trigger (which was at a lower level), but did not really ever dip to the next downside trigger (now at 20.0 €/MWh). Given a tighter supply side (lower supply from Norway, the Netherlands and the UK) and a higher required injection level, we expect to see a similar trading pattern over the coming months, with prices trading around the 22.2 €/MWh trigger.

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