November brought two main bearish fundamentals to Northwest Europe (the Netherlands, Belgium, France and Germany)—robust y/y rises in LNG supply aligned with lower aggregate res-com demand. The resulting burgeoning y/y storage surplus relaxed the supply-demand balance as we head towards Q1 19. Both of these bearish drivers are expected to continue through December, which could support some coal-to-gas fuel switching this month. A return to mean weather would still see the region’s total gas demand increase in January but drop across February and March, leaving Q1 demand down by 3.1 bcm y/y. With LNG still expected to add incremental volumes over Q1 19, and with aggregate end-user demand forecast to drop y/y, our balances suggest that the y/y EU storage surplus could end-March as high as 39 bcm – some 22 bcm higher y/y.
The combination of higher LNG supply and moderately softer end-user demand y/y in November has helped storage inventories in continental NW Europe move from a start-of-November 0.67 bcm y/y surplus, to a much wider 4.6 bcm surplus y/y by 8 December. With short-term weather forecasts and balances indicating that the surplus will continue to widen over December, aggregate European stocks should grow to a roughly 6.5 bcm y/y surplus by 21 December.
That level of surplus should put Europe in a comfortable position to weather most short-lived cold snaps with less price volatility than we saw in Q1 18. The big variables here are how cold it gets over Q1 19 and how much added LNG we should expect to come into the region. In terms of the weather, while more forecasts are calling for a colder-than-normal Q1 19 in the region, it is unlikely to be as cold as last year’s ‘Beast from the East’. As such, end-user demand in the region carries a strong bias towards a y/y drop in Q1 19, although the y/y drop will be less severe if we don’t experience a full reversion of temperatures back to the mean level. Given expected demand weakness, we expect that Q1 19 will see solid increases in LNG supply to Europe of around 4.0 bcm y/y, with much of that being destined for NW Europe.
The TTF D+1 has started to trade around the 45% v 30% fuel switch price trigger (23.2 €/t), the one we expect will be the seasonal low under most winter weather scenarios. As such, we see little added price downside provided that LNG supply does not significantly overshoot our expectations. A prolonged cold snap in Q1 19 in Europe or colder Asian weather would move prices back towards the winter mean fuel switch trigger that is sitting at 25.6 €/MWh (with coal at 86.5 $/t and carbon at 20.3 €/t).
|Fig 1: EU fuel-switching at the prompt €/MWh||Fig 2: Incremental French nuclear capacity, GW, y/y|
|Source: Reuters, Energy Aspects||Source: RTE, Energy Aspects|