European gas markets continue to be driven by the bears, with the end of January not as cold as once expected and early February only showing moderate deviations below normal temperatures, according to the latest EC model weather runs. This suggests a y/y reduction in res-com demand in early February, and given a steady stream of LNG set to come into the market, supply over the end of winter and into summer 2019 looks bountiful.
Last week saw this winter’s first extended cold snap, resulting in a heavy stockdraw that cut the total European y/y storage overhang by 1.4 bcm w/w to 5.3 bcm. Another week of colder weather y/y should slash that to 5.0 bcm by month-end, though it will begin to grow again afterwards—hitting about 6.2 bcm by 8 February.
Indeed, even if we see some colder-than-average weather in February-March, it is likely that the y/y storage overhang will still increase. HDDs in February 2018 were up by 24% against the five-year average and NW European LDZ demand averaged about 0.9 bcm/d, roughly 0.15 bcm/d above a seasonally normal February. At the time, LNG sendout averaged just 40 mcm/d. However, LNG supply has ramped up by more than demand this year, and we expect the observed 0.10-0.15 bcm/d y/y rise in LNG sendout to continue. Assuming two months of normal weather, our current balances suggest an end-March storage carryout of 35 bcm, some 18 bcm higher y/y.
One of the few upsides to EU gas prices this summer is the possibility that the Dutch government could this week announce further cuts to Groningen supply this gas year. The Dutch Council of State is expected to publish a ruling on 31 January regarding an appeal to close the field immediately or, if that is not possible, to at least cut gas year 2018-19 output to 12 bcm/y. While the field is on track to produce less than the current 19.4 bcm/y cap, a cut to 12 bcm would remove a good 6 bcm of supply from the rest of this year, providing some support for what otherwise looks to be a well-supplied summer.
Sum-19 traded at around 19.95 €/MWh this morning (28 January), with the backwardation to Feb-19 at 65 cents/MWh. Without further cuts to the Groningen cap, current market backwardation does not look deep enough to drive the additional coal-to-gas fuel switching that will be needed to balance the gas market this summer. For that to happen, Sum-19 needs to drop to the 5% fuel switch trigger, which is currently at 19.3 €/MWh, 1.3 €/MWh below Feb-19. That is priced on coal currently below 80 $/t and carbon at 24 €/t. We are bullish on both commodities, so the implied flat price given by those triggers could well be even higher in the future.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|