The TTF M+1 contract closed in a 21.2-22.7 €/MWh range over June. The contract was largely driven by the upward moves coal and carbon prices, although the summer contracts did soften in relative terms. Gas prices are now trading consistently below the fuel switch level to which they have gravitated towards over the current summer period, with TTF Aug-18 prices closing at 22.4 €/MWh compared to the trigger being bid up to 23.5 €/MWh on stronger coal and carbon prices.
The softening of relative prices came against a background of a further reduction in the y/y storage gap to around 2 bcm at the start of July, with 1 bcm of the gap eroded over June. The storage gap has continued to drop over the first two weeks of July, although the second half of the month could see a slowdown in injection rates in NW Europe as Nord Stream goes offline for maintenance for two weeks. While we expect that most of the flows that would normally go through Nord Stream will be rerouted through Poland and Ukraine, July will likely be only the third month since January 2017 to see a y/y reduction in Russian flows.
Some further support for gas prices could come from the extended period of hot and dry weather that was experienced over May and June in northern Europe. The biggest impact so far has been on Nordic hydro generation, with the hydrological balance looking some 25-30 TWh lower than last year, which was close to the seasonal normal. This has already started to curtail Nordic power exports to continental Europe, which is leading to a higher call on thermal generation in the area. The weather has also led to low water levels on the Rhine, which is reducing the loads that coal barges can carry to around just 30% of the full load. While coal-fired output does not yet seem to be affected, a sustained period of reduced loadings would begin to curtail that generation.
While gas-fired generation could see a jump on those developments, we still expect total gas demand over Q3 18 to be softer y/y. This is due to more French nuclear availability (up some 4 GW y/y in mid-July) and Alpine hydro generation which is likely to stay strong as reservoir levels are still comfortably higher y/y in the region. The long hot days have contributed to much stronger solar generation across Europe. As such, end-user gas demand over Q3 18 across southern and central regions should be under pressure, and we forecast it will fall by 2.2 bcm y/y while gas demand in the northern regions will rise by 1.2 bcm y/y.
The NATO summit in mid-July put the Nord Stream 2 (NS2) pipeline back on the political agenda, with US President Trump directly linking US NATO contributions to German energy spending. There is growing political resistance to the pipeline, although it is on the verge of starting construction. With most offshore consents already in place, it is unclear exactly what can be done to stop the pipeline. Some of the political opposition to the pipe could be softened at a forthcoming trilateral meeting (Ukraine, Russia, EU), which will discuss Ukraine’s future role in transiting Russian gas to Europe. We still expect NS2 to go ahead, with the big question for the gas market being when will the pipeline come online. We expect the pipeline to be online no sooner than Q2 20.
For July and August, lower LNG sendout, some disrupted Russian supplies and continued softness in Dutch and UK supply should keep the European hubs from softening much further in relative terms, despite forecast gas demand being lower across all of Europe.