If in August the market had been holding out hope of closing the y/y storage gap by October, a sustained late summer slowdown of Russian flows followed by revised weather forecasts indicating a late September cold snap have buried those hopes. We forecast that Europe will now enter winter with stocks at about 80.8 bcm, 3.5 bcm lower y/y, with this providing further price support as the market looks to continue to push gas out of power.
Northwest Europe largely closed its regional y/y storage deficit last week, injecting 1.26 bcm in the week to 21 September, compared with a 0.7 bcm net withdrawal the same time last year. Russian flows into NW Europe remain higher y/y, but Russian supply into Central Europe has been much weaker y/y, opening up a considerable 1.8 bcm storage deficit in Baumgarten.
Storage builds are likely to come under more pressure this week, as total supply will be lower y/y owing to ongoing Norwegian maintenance constraints, weak LNG sendout and a strong drop in Dutch output. As a result, we expect that the NW European injections will ease to about 1 bcm in the week to 28 September, 0.75 bcm less y/y. Paired with weak Baumgarten injections, gas prices will continue to follow fuel switch triggers to levels that will push gas out of the generation mix, in an effort to keep the storage gap from getting wider as we move into the start of the gas winter. With October 2017 seeing a healthy stockbuild of some 3.9 bcm, European storage is going to keep running a y/y deficit at least until November.
Underlying power sector need for thermal generation has been variable, with current unsettled weather leading to bumper wind generation that has helped limit the sector’s gas demand. Nuclear availability remains patchy, with Belgian, German, and UK outages offsetting some of the capacity gains in France. Still, low Nordic hydro levels, which are reducing hydro generation, are supportive for continental power sector gas demand. Consequently, a tight supply-demand balance will see gas prices continue to chase relative fuel (coal, carbon) contracts higher.
We expect the super bull run in carbon to continue in the coming weeks, with that market having paused a little last week before the quarterly expiry of EUA options on the 19 September. By the end of last week, EUAs started moving higher again and we expect prices to continue rising, moving the fuel switch triggers higher. Last week, gas prices moved above what we expect will be the mean fuel switch trigger, which was at 28.37 €/MWh at Friday’s close. With the start of October now forecast to be cooler y/y and supply looking mixed, with pipe flows likely to ramp up but LNG staying low, it will need a period of sustained high pipeline supply to take some of the risk premium out of the market.
|Fig 1: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: GIE, Country SOs, Energy Aspects|