December 2018 carried forward many of the same bearish dynamics that we saw at work in November 2018—strong LNG sendout and weak gas demand preserving stocks. The y/y storage surplus for continental Northwest Europe (Netherlands, Belgium, France and Germany) stood at a hefty 6.4 bcm on 5 January. The growing y/y surplus provides an increasingly robust bulwark against any potential cold snaps in Q1 19, though a severe weather event—similar to last year’s ‘Beast from the East’—could of course clear that surplus. Current weather forecasts indicate that January HDDs will be +12% y/y (and just a touch below the historic average), but a return to mean weather the rest of the quarter should still mean an aggregate drop in demand of 9.9 bcm y/y in Q1 19. We also expect LNG deliveries into Europe to remain strong this quarter (+4.3 bcm y/y), supported by a ramp-up in global supply. Given December’s light stockdraw, our balances now indicate that European storage could end winter as high as 35 bcm, 17 bcm higher y/y.
The TTF and surrounding hubs all eased in price over December 2018 and early January. The loose supply-demand balance in December 2018 led continental Northwest Europe to post a stockdraw of just 4.7 bcm—4 bcm less y/y—widening the y/y storage surplus to an impressive 6.4 bcm in early January, from 3.1 bcm at the start of December 2018. Current forecasts call for HDDs across the region to rise by 10% y/y in the next two weeks, but considering a continued y/y uptick in LNG sendout, we do not expect to see the storage surplus shrink. However, forecasts for the two weeks from 21 January do point to lower-than-normal temperatures, and a prolonged cold-weather event would see that y/y storage surplus start to ebb away.
January was previously the only month we had expected a y/y increase in storage pull this winter (on a reversion to mean temperatures). Most of the storage build we now expect to see in Q1 19, given a revision to mean temperatures, will be in February and March. With LNG added into the supply mix and projected end-March stocks at 34 bcm, the TTF has softened considerably in response. While a fall in coal and carbon prices has helped ease gas prices, the TTF has dropped in relative terms, moving all the way down to the fuel switch trigger that puts gas-fired plants with a 10% efficiency advantage over coal-fired plants into merit (at 21.7 €/MWh).
Even in summer 2018, we did not see relative pricing that low. Now that the oil market has cooled, coal has returned to trading around 80 $/t (from Q4 18 highs that peaked at 102 $/t) and carbon is likely to trade around 24 €/t, the rest of the winter months should continue to trade around that fuel switch trigger. There is still half of winter left, so if we do see a cold period more sustained than the two weeks from 21 January currently forecast, this would move TTF prices up one fuel switch trigger (15% efficiency advantage)—back towards 24.1 €/MWh.
|Fig 1: Incremental total gas demand, bcm||Fig 2: Continental NW EU LNG sendout, bcm|
|Source: Country SOs, Energy Aspects||Source: Country SOs, Energy Aspects|