One of the developments of the year has been the rise in gas prices, with the TTF Nov-18 contract some 54% higher than the Nov-17 average outturn price. The increase has happened with little change in EU gas burn that could be directly attributed to any price-sensitive response. As we have consistently argued in these Outlooks, the seeds of most of the gas price rises have been in related fuels market developments, particularly carbon.
Heading towards November, coal and carbon have started to trade sideways to down. It may be too early to call an end to the carbon super bull run, but EUA prices have temporarily paused the upward trend. The market seems to have reverted to more technical trading, testing the technical high and low support levels. The market still ultimately seems to be in the hands of speculative money though, so directionally, the question is do we get another batch of conviction buy and holds, or is this technical stasis where we hold for the rest of the year?
The pause in the EUA bull run has allowed winter fuel switch triggers to ease over the first half of October. By mid-October, the winter anchor trigger was sitting around 27.0 €/MWh, from over 29.0 €/MWh at the start of the month. We do expect that periods of tightness (cold weather forecasts) will drive the market towards the winter trigger and possibly above, while any softening of the market balances—and moving to a y/y storage surplus—would push the market down to the lower fuel switch level sitting just above 24 €/MWh.
Our balances still call for a transition from a y/y storage deficit to surplus by the end of November, then consolidation and growth of that surplus through December. As such, the market could start to drift towards that lower support level over the next two months. Still, this is all dependent on mean-reverting temperatures, which would result in lower res-com demand y/y through the next two months. Also, while the prospects for more gas into power are still there, Nordic hydro levels have improved significantly over the last four weeks, almost halving the y/y shortage of energy held in the reservoirs. While the y/y gap is still a large number, it is less supportive of more gas into power. Meanwhile, nuclear availability on the continent looks much better, thanks to a vast improvement in France only partially offset by high outages in Belgium.
The main word of caution is that winter will have its period of cold spells, and the low levels of flexibility now in the market—given low Rough sendout and low Groningen production—means the European hubs are going to be prone to spikes. One new development that could help, particularly for southern gas hubs, is the move by Gazprom Export to start selling incremental gas on a short-term basis (M+1, M+2) for delivery predominantly into southern European gas markets (see Insight: Russian flows to the EU: Where to now?, 15 October 2018). Already sales on Gazprom Export’s Electronic Sales Platform total over 0.56 bcm for November delivery. While total Russian flows will still be dependent on customer nominations, these volumes will help the Baumgarten region make up for the still-large y/y current storage gap.
In terms of Dutch production, it will not have to fall as much y/y to come in at the new cap. While the new gas year’s Groningen cap is some 2.2 bcm lower than last gas year’s cap, Groningen production in 2017–18 came in at 20.1 bcm y/y—a 3.9 bcm y/y drop and some 1.5 bcm below the cap. As such, to come in at the new gas year cap, Groningen production will only need to fall by 0.7 bcm y/y. Still, it is hard to expect this gas source to materially soften winter gas price spikes.
In early October, the UK government issued a paper that provided the clearest statement from the government on ETS obligations for UK installations in the event of a no-deal Brexit. Namely, the UK would leave the EU ETS immediately. UK installations would be required to comply with 2018 emissions obligations in March 2019 but would have obligations under the ETS for 2019 onwards removed. The UK government said it would maintain the UK carbon tax on generation fuels. While the paper was something of an exercise in disaster planning, it does have some implications for gas markets, mostly because this would immediately drop UK power prices, which would have implications for cross-border power flows.