Flat price strength continued in EU gas markets despite the y/y European storage gap narrowing to 3.6 bcm by Friday. Russian supply was stronger y/y and there was a significant slump in demand on much milder weather y/y, but the storage deficit could have closed even further if Russian supply had been as strong as expected. We are now likely to head into winter with stocks lower y/y, given that it is already halfway through September, and the market is very sensitive to the pace of Russian imports. Both the persistence of the y/y storage gap and variable Russian flow rates are leading to considerable risk premium being priced into winter contracts, keeping the Q1-19-Sum-19 spread well above 4.0 €/MWh.
Aggregate Russian supply into Europe has continued to fall below expectations at about 0.48 bcm/d, and the market will be watching for any consistent uplift in the coming weeks. The rest of the supply picture does not look overly promising either. We expect Norwegian supply to rise y/y towards month-end due to maintenance ending, but only by 5-15 mcm/d.
Despite the modest nature of y/y supply increases, the storage deficit should continue to narrow the next two weeks owing to significant drops in aggregate demand. Most of the fall will be because of lower res-com demand, with HDDs expected to remain well above average, compared to a September 2017 that sustained the coldest weather for the month in 10 years. So far, temperatures in Northwest Europe are forecast to remain well above average for the second half of September and longer-term forecasts indicate a seasonally mild October. Lower res-com demand should allow for an early winter y/y stockbuild, driven by either higher injections or lower y/y withdrawals. October 2017 was relatively mild, and that supported an 3.9 bcm stockbuild, so materially higher y/y storage levels might have to wait until November.
With Russian supply transited via Ukraine remaining stubbornly slow, we are likely to see gas prices remain at levels that limit gas use in the power sector to preserve gas for injections in the next two weeks. We expect a stockbuild of 1.4 bcm in the week to 21 September, compared to a net withdrawal of 0.7 bcm the same week last year. We expect aggregate European stocks to be about 2 bcm lower y/y by the end of the month.
With time running out to close the storage gap, we expect that the market will trade close to the prevailing trigger (at 27.6 €/MWh on Friday’s close), with prices heading above it when Russian flows slow and softening below it as flows pick up. It is hard to see a drop to the summer anchor trigger (24.9 €/MWh) in the coming months, unless the market becomes more relaxed about Russian flows and storage inventories.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|