Continental European prompt prices closed higher last week because of upward movement in the two related fuel markets. Coal and carbon both rose, pushing the fuel switch triggers up by around 2% w/w, with the key summer trigger closing at 22.8 €/MWh on Friday. Despite a high level of storage injection in NW Europe, the prompt also helped push up the winter curve.
Forecasts for hot, dry weather have been extended again, with prevailing conditions now expected to continue through at least 18 July. All of that hot, dry weather has plenty of implications for power, although last week power sector gas demand eased in France and Germany on higher y/y French hydro generation and record high German solar generation.
That said, gas-fired generation was on the rise in other parts of Northwest Europe last week, and will continue to find support there the rest of this month. The impacts of the drought in Northern Europe are starting to be felt now in the power sectors and this should continue throughout the summer. Nordic power exports are set to fall on the sharp deterioration in the Nordic hydro balance. Coal restocking at German plants along the Rhine has slowed due to low water levels and rising water temperatures could, in time, limit water available for nuclear plant cooling.
The lower availability of Nordic exports, combined with a sizable 2.9 GW of Belgian nuclear capacity scheduled to remain offline through the first week of August, pushed Belgian power sector gas demand up sharply y/y over the last week. UK gas-fired output also rose y/y last week, offsetting lower nuclear and coal-fired generation. Given these dynamics, we expect aggregate NW European gas demand to be up by about 8 mcm/d w/w to 0.41 bcm/d.
In order to narrow the y/y storage gap, or at least ensure it does not widen out from the current 1.85 bcm, supply will need to stay robust. We expect strong Russian pipeline deliveries this week, even though planned works are expected to cut Russian flows via Mallnow. With the Nord Stream shutdown scheduled to start on 17 July, we expect contract holders will keep nominations high for the rest of the month, pushing more deliveries through Velke Kapusany w/w. LNG sendout continues to weaken as the wide JKM-TTF basis leads to increased cargo diversions and reloads.
We forecast a NW European stockbuild of 1.8 bcm in the week through 13 July, which would narrow the y/y storage gap to 1.6 bcm. Another strong stockbuild this week will be important as it will be harder to further shrink the storage gap in the second half of July because of the Nord Stream shutdown, while drought conditions could push more gas into the power market later in the summer. If storage builds ease materially in the first half of July, this should keep gas prices supported in relative terms, keeping them close to the prevailing fuel switch trigger.
|Fig 1: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|