While European prices were relatively soft when weather forecasts were calling for a colder-than-normal first half of February, the big revisions to be warmer-than-normal emerging on Friday and reinforced on Monday have seen prices dip further. By this morning, the Q2 19 contracts were all trading at the 5% coal-to-gas fuel switch trigger. This is two fuel switch triggers lower than last year, which we estimate could deliver up to 13 bcm of additional demand across summer 2019.
The market for summer gas is pricing in a way that suggests this much incremental demand is needed for balance. Part of the weakness is due to the strong storage position. While last week’s stockdraw was 0.9 bcm higher y/y due to colder-than-normal weather, European stocks still ended January higher y/y by 4.4 bcm. Given that stocks finished January 2018 higher y/y by 7.3 bcm, inventories are already comfortable. Last year’s severely cold February-March left the end-winter storage carry at a low of just 17 bcm, and no such deep freeze is currently forecast for this year.
This morning, weather runs indicated that temperatures on 5-19 February will be much higher y/y and higher than previously forecast, easing res-com demand considerably y/y. At the same time, LNG sendout should only rise y/y, with a tight JKM-TTF spread and rising global supply pushing more cargoes into European ports. The combination of weak demand and robust supply will lead Europe to post some comparatively small stockdraws (vs 2018) over the next two weeks, ensuring that the y/y surplus continues to grow. We forecast a NW European stockdraw of 3.2 bcm, a hefty 2.8 bcm less y/y, taking the total European y/y surplus to almost 8.0 bcm by mid-February. By the end of March, assuming normal weather for the month, we expect that storage overhang to come in around 15–20 bcm.
The market will stay highly sensitive to the weather runs this month, but continued confidence that the weather will come in warmer than normal will likely see prices crashing below the 5% fuel switch trigger. If storage inventories appear to be heading to the high end of the inventory range we set out above (+20 bcm y/y), the market could even support a movement down to the parity fuel switch trigger where gas plants with no efficiency advantage are still more economic than coal. Such a low-price scenario is certainly possible on warmer-than-normal weather, with that ‘parity’ trigger currently down at 16.5 €/MWh. One piece of price support could come from lower Norwegian summer exports given a Q3 19 maintenance that is slated to affect 3.6 bcm more production capacity y/y.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|