The mild weather that helped Europe to make an early winter stockbuild this month ended abruptly over the weekend, but with the cold snap set to be short-lived and LNG supply looking strong in the near term, the market has shrugged it off, leaving prices largely soft and Europe set to make another net stockbuild this week.
The flurry of Asian LNG buying that kept supply short for Europe all summer eased at the start of this month, while some bumper supply has freed up spot cargoes for Europe too. The result has been a rapid filling of LNG storage, even amid a quicker pace of LNG sendout, with aggregate stocks rising to 74% capacity by 27 October, compared to the 50-60% range in which stocks spent September. NW Europe will post higher y/y LNG sendout for the month of October (at an estimated 0.1 bcm/d), the first time it has done so since May.
We have been arguing that over the last few weeks Asia largely concluded its winter buying, and a mild October means there is little demand for spot cargoes there. On the supply side, the 4.2 Mtpa Ichthys plant exported its first cargo last week, while both the 4.5 Mtpa Corpus Christi and Sabine Pass Train 5 are close to exporting their own debut cargos, pointing to a looser supply-demand balance. The JKM-TTF spread has narrowed to just 2.75 $/mmbtu for Jan-19 and Feb-19 contracts, compared to 3.58 $/mmbtu a month ealier. The narrower spread means Europe is poised to receive more LNG in Q4 18 than appeared to be the case in late summer, restoring a much-needed source of supply flexibility just as the region moves to making net withdrawals with the arrival of cold weather. This should reduce price sensitivity, allowing the system to meet moderate upticks in demand with less price volatility than the market expected a few weeks ago.
LNG sendout is now the main supply driver that will close the y/y storage deficit. Northwest Europe made a stockbuild of 0.54 bcm in the week to 27 October, 0.14 bcm more y/y. We forecast that NW Europe will make a net injection of 0.22 bcm in the week to 2 November as strong LNG sendout and lower y/y res-com and power sector gas demand should preserve supply for injections. We then see a net stockdraw of 0.2 bcm the following week, compared to a 0.72 bcm y/y net withdrawal the same time last year, and this should just about close the y/y European storage gap.
As we have become far less constructive on carbon, we expect EUA prices to take a breather from putting upward pressure on gas prices. Greater LNG supply has helped push the market to the lower fuel switch trigger, which is now at 24.2 €/MWh. Any further softening of the TTF below that trigger will seem somewhat overdone by the market. Even at that level, it is very early in the winter, so the market likely holds much higher upside potential from here.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|