January saw continental gas prices tumble as very strong LNG sendout partially offset a moderate uptick in demand due to colder weather y/y. As a result, the y/y storage overhang only slightly narrowed, ending the month at 5.2 bcm. With February forecast to be unseasonably mild, the window for an extreme weather event to soak up supply is essentially closed. NW Europe is likely to end the winter with stocks roughly 15-20 bcm higher y/y. Gas prices extending through the rest of Q1 19 have already dropped towards the 5% fuel switch trigger to help balance the market, with summer-delivery contracts just below that trigger. A much looser supply-demand balance has led us to revise our Q1 19 and summer 2019 balances. We now expect Q1 19 gas demand in Belgium, France, Germany and the Netherlands to fall by 1.6 bcm y/y. We then expect summer 2019 demand to rise by 7.3 bcm y/y to 68 bcm, as European gas prices linger at levels that seek to push nearly all gas-fired units into merit above coal-fired plants in the continental markets.
A return to temperatures in line with the ten-year average in January pushed HDDs up by 24% y/y, raising res-com demand by an impressive 2.9 bcm y/y across continental NW Europe. Despite that demand growth, plentiful LNG supply (+2 bcm y/y) led the region to end the month with a 5.2 bcm y/y storage overhang anyway. February is forecast to be milder than normal, and even assuming a return to normal temperatures in March, the remainder of this winter is expected to see sharp gas demand y/y reductions owing to Q1 18’s high res-com base.
Incremental LNG supply should continue to be a feature of the NW European gas market for the remainder of the year. The loose supply-demand balance over the next six or so weeks leads us to forecast total European stocks ending March higher by 15-20 bcm y/y. The bearish implications for summer balances have meant that the market is already bringing fuel-switching dynamics into play, creating a bigger role for gas in the power sector.
Since mid-December, D+1 prices have fallen from the relative price level at which a gas plant with a 15% fuel efficiency advantage over a coal plant is in merit, to pricing in gas plants with just a 10% efficiency advantage by the start of February. The mid-February market is pricing summer gas prices at the 5% fuel switch level, leaving continental power merit orders far more gas-heavy and light on hard coal. With most of the available fuel-switch set to be used, by pricing nearly all gas plants into merit in order to balance the loose gas market, summer increments of gas demand from the power sector into NW Europe will be 6 bcm higher y/y.
With NW Europe being the main beneficiary of incremental LNG supply, the TTF saw far more downward price pressure than hubs further away from the LNG import facilities. The TTF D+1 price expanded its discount to the NCG by 60 cents/MWh to close at -90 cents by the end of the month, and Central European gas contracts also extended their premium to the Dutch hub. We see little reason for that basis to narrow over summer 2019, with Russian flows likely to ebb on lower nominations.
|Fig 1: EU fuel-switching at the prompt €/MWh||Fig 2: LNG imports, weekly by country, bcm|
|Source: Reuters, Energy Aspects||Source: Bloomberg, Kpler, Energy Aspects|