European hubs are starting the week in a more bullish mood, as some of the bearish factors of the last couple of weeks are fading. The latest weather forecasts show temperatures dipping below average from 11 December onwards. The related fuels complex also started heading up last week, with coal adding 3 $/t w/w to close Friday at 85 $/t, a move likely to continue this week as oil prices have jumped this morning on a ceasefire in the US-China trade war (see E-mail alert: Xi and Trump reach fragile truce on trade war, increasing Chinese purchases of US LNG, 3 December, 2018), production cuts in Canada and tentative progress towards an OPEC deal.
Aside from those bullish factors, there are underlying bearish issues that continue to drive the gas market. Aggregate European stocks as of 1 December held a 1.2 bcm y/y storage surplus, and while that number is relatively small, it is a considerable change from the 1.4 bcm y/y deficit with which Europe began November. We stress that the surplus could be eliminated by colder y/y weather, which is currently forecast for the second half of December. However, with another eight days of weather that is milder than last year to get through first, and record-high LNG port receipts scheduled this week, the y/y storage surplus should rise to about 2.6 bcm by mid-December, increasing the chances that Europe will enter Q1 19 with higher y/y stocks.
Norwegian and UKCS pipeline supply will stay lower y/y this week, but we expect LNG sendout to remain stronger y/y, likely keeping aggregate supply higher than last year. Global forecasts are showing a rising probability of an El Niño event that could keep NE Asia weather mild in Q1 19, which would keep the JKM-TTF basis tight and encourage spot cargoes to sail to Europe. And with a trio of new LNG trains slated to add over 1.0 Mt/m more LNG y/y into global supply in Q1 19, it looks increasingly like the large y/y increases in LNG sendout that have preserved European stocks this quarter will continue.
The recent moves in coal and to a lesser extent carbon shifted the fuel switching trigger prices back up by some 70 cents w/w, with the winter mean fuel switch trigger at 25.6 €/MWh and the winter low at 23.2 €/MWh. The TTF Q1 19 contract is now pricing just below that low trigger, and an extension of the cold weather forecasts further into December are likely to push price levels closer to the mean trigger.
Despite the latest weather forecasts putting some gas demand back into the market’s December balances, higher LNG sendout is likely to keep the y/y storage surplus growing through the first half of December. In turn, that storage surplus should keep TTF pricing from going much above the mean fuel switching trigger.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: GIE, Country SOs, Energy Aspects|