Counter to our expectations, Q4 18 has been the quarter in which LNG supply to Europe has started to increase. Incremental sendout of LNG in November outpaced incremental port receipts by around 1.3 bcm as full storage tanks made some room for incoming cargoes. For Q1 19, the prognosis for incremental LNG into Europe is still constructive. Four new LNG export trains are set to start up over December–January, which should mean solid incremental supplies over summer 2019. With more trains coming online later in 2019, supply from which is expected to outpace Chinese growth, more LNG could be heading to Europe for at least the coming two years.
Going into winter 2018–19, we expected to see end-user gas demand fall in Q4 18 if temperatures were either normal or higher than average—and end-user gas demand did indeed fall (by 2.1 bcm y/y in the main Western European markets). The trend for lower y/y end-user demand has largely continued this month, allowing the y/y storage surplus to build—it breached 4 bcm in mid-December and we forecast that it could climb to more than 6 bcm by end-December.
Over Q1 19, lower y/y end-user demand could persist. A reversion to mean temperatures implies a 10.6 bcm y/y drop, 7.1 bcm of which would be in western markets. Even if it is colder than normal, end-user demand should still ebb, provided it is warmer than the very cold end of Q1 18. Mean-reverting temperatures would indicate higher y/y January 2019 demand, with the Q1 19 average being lower y/y due to the cold weather episodes in February–March 2018.
Despite the looser gas balances in November and most of December, hub prices have trended higher over the first half of December. This is largely due to relative fuel prices, with European coal prices adding back around 7 $/t over the last three weeks, to 90 $/t. Cif ARA prices have been pushed around far more than Pacific basin FOB coal prices due to developments in the oil market after the OPEC meeting. As we are bullish oil for 2019, we are bullish coal. European carbon prices traded in a wide band in the last four weeks—around a 20 €/t mean—and weathered the potential storm of the expiry of Dec-18 options and futures without a major sell-off. We are still bullish EUAs, particularly given no EUA auctions until the second week of January—and even then at a reduced level (no German, UK or Polish auctions).
Given those moves in coal and carbon, by mid-December the winter anchor trigger (mean-reverting) has gone back up to 27.6 €/MWh (from 25 €/MWh as the start of the month), while the lower anchor trigger was at 25.1 €/MWh (from around 22 €/MWh at the start of the month). We continue to expect that periods of tightness due to cold weather forecasts will drive the market towards the winter anchor trigger. TTF Q1 19 prices in mid-December have broken below 25 €/MWh, trading just below our lower winter trigger level. We do expect most of the risks being to the upside. We continue to see the coming Q1 19 as reverting to the winter anchor fuel switch trigger, which is now sitting around 27.6 €/MWh, provided seasonally normal weather.
For summer 2019, the expected combination of more LNG and more gas in storage to start the season suggests gas prices will be softer y/y, taking prices down another fuel switch trigger. We expect average coal prices of 98 $/t and carbon at 27 €/t, so the TTF should average 25.2 €/MWh—lower in relative, but not absolute levels.