A change in weather forecasts in mid-November altered expectations for the second half of this month, with Europe promised its first taste of colder than normal winter weather. The first half of November was mild, contributing to y/y demand reductions in res-com, so storage inventories improved. The y/y storage gap has now closed in aggregate. Given how cold November 2017 was, even with a colder-than-normal second half to November 2018, we expect lower EU demand by around 3.6 bcm y/y. However, the promise of a potentially persistent cold snap has caused the market to revert to the higher fuel switch trigger, which we expect will be the winter mean.
The biggest surprise so far this withdrawal season has been the rise in LNG supply to the European market. Total net imports jumped by 1.5 bcm y/y to 5.5 bcm in October, while preliminary data for November suggest that net takes will come in 1.3 bcm higher y/y at 4.5 bcm.
The return of LNG was largely about global supply levels outperforming expected October numbers, by almost 2 Mt, largely corresponding with the amount of incremental supply into the EU. Stronger supply y/y could well continue into December because of two market developments. First, two of the four liquefaction trains we expected to start producing gas this winter look to be starting up early. Second, key parts of NE Asia have had a very mild start to winter, with heating requirements in October and the first half of November suppressed. Given this, the NE Asian call on spot cargoes should be low for the remainder of Q4 18.
European coal prices have been dropping on a mild start to winter and high coal stocks at ARA. Over the first two weeks of November, Cif ARA coal has come off by around 10 $/t to take the benchmark contract to just below 90 $/t. EUA prices have been a constant source of volatility in the EU gas markets this year, with November already seeing the commodity trade in the 15-20 €/t range. While carbon will be volatile, we think it is likely to stay around 20 €/t for the next four weeks, while coal is as low as we expect it to go for the winter. The lower coal prices mean that the EU gas hub triggers have softened, taking the winter mean-reverting trigger from above 29 €/MWh in mid-October down to around 26 €/MWh by mid-November.
Gazprom Export is regularly selling short-term gas to the EU through its Electronic Sales Platform (ESP). Gazprom ended up selling some 0.56 bcm of added gas to be delivered at a flat hourly rate through November, the first real month for which it has sold gas for delivery on this platform. All of the gas is to be delivered into the EU through Velke Kapusany, with around half of it left at the Slovak VTP and the rest delivered at Waidhaus on the Czech-German border. For December, Gazprom is on track to sell a similar amount. Gazprom is also busy building Nord Stream 2, having laid more than 200 km of the offshore pipeline. While the route may have to be extended to avoid Danish waters, it is possible that the pipeline is completed and operational for Q1 20.
Since the start of November, the NBP-TTF M+1 spread for Dec-18 has traded above 2.0 €/MWh. This is historically wide given the M+1 spread was 0.8 €/MWh in November 2017. Even the D+1 spreads in December 2017 were only 1.78 €/MWh, when the NBP spiked due to a significant Forties pipeline outage. The wider spread this year likely has its roots in the ending of all the long-term capacity holdings on IUK on 1 October 2018 and its replacement with shorter-term capacity holdings. With full short-term costs of exporting gas from the NBP to Zeebrugge at 2.1 €/MWh for December, the impacts of this change will continue to be felt in the forward spreads.