European hubs have started the year trading at a very soft relative level, as a growing storage surplus and forecasts for predominantly normal/warmer-than-normal weather for the next two weeks has weighed on prices. Low LDZ demand combined with sharply higher y/y LNG sendout should allow the European storage surplus—at 5.7 bcm y/y as of 4 January—to grow, providing an ample cushion to manage peak-winter demand events that could occur in February or March.
Two of the fundamentals that sent European gas prices soaring in Q1 18—very cold weather and scant LNG sendout—have noticeably reversed so far in Q1 19. The milder-than-normal weather that characterised Q4 18 appears likely to continue for at least the first half of January, which would lead to a lower stockdraw y/y. We forecast a NW European draw 0.7 bcm lower y/y over the coming two weeks, which would lift the total European stock surplus to 6.6 bcm by 18 January.
Additionally, with global LNG liquefaction continuing to ramp up in Q1 19 and little sign of cold weather expected in Asia, it appears that the large y/y increases in LNG supply into Europe are likely to continue, providing a bulwark against cold snaps.
Further softness in coal (down below 83 $/t) and carbon (to around 23 $/t) has also pushed down the fuel switch triggers. What we had seen as the low fuel switch trigger (24.16 €/MWh) has long been left behind and gas prices are now down at the point (21.7 €/MWh) where gas-fired plants with just a 10% efficiency advantage over coal-fired plants are getting into the money. At these levels, which would be soft in relative terms even for a summer, gas-fired generation should increasingly be in merit in continental European markets.
Current prices suggest something of a risk-off approach to the remainder of the winter’s weather. A cold weather event of the magnitude of last year’s ‘Beast from the East’ would soak up some of the gas sitting in storage. For example, the total European stockdraw in the week to 28 February 2018 was 4 bcm higher y/y at 6 bcm. As a result, winter 2017/18 ended with a very low level of storage of just 16 bcm. That notoriously cold end to Q1 18 buoyed the gas market for most of the rest of 2018. For the market to fully discount that seems overly bearish, given that most weather forecasts for the period beyond 21 January are still for colder than average weather.
As we get closer to that forecasted period of cold weather, NW European hub prices should see more support than currently being reflected in price levels, unless weather forecasts shift towards milder weather. Of course, LNG is the other factor that is very different y/y. With no signs of incremental supply growth abating, it should allow Europe to get through any extreme weather events with a lower magnitude of volatility than in Q1 18.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|