The Mar-19 contract has started trading at a discount to Apr-19, a rare occurrence, due to what certainly feels like the temporary early onset of spring. Such contango is less common at EU hubs than it is for the US benchmark, since the introduction of shale has meant that Henry Hub is almost permanently well-supplied. The contango between those contracts in early trading today (25 February) has expanded to over 23 cents/MWh from six cents backwardation just a week earlier, as the lack of res-com demand and steady LNG supply has led the market to encourage keeping gas in storage.
A historically small storage withdrawal last week pushed EU-wide stocks to an 11.8 bcm y/y storage overhang, out from 8.2 bcm a week ago. We expect to see that storage surplus widen over the coming weeks as exceptionally mild weather will keep res-com demand low, while higher French nuclear availability and strong renewable generation will curb gas into power. With supply still high on robust LNG sendout, and large storage withdrawals from 23 February–8 March 2018, the y/y storage surplus could be as large as 19 bcm by 8 March 2019. There is a reasonable chance that the end-March carryout could be 25 bcm higher y/y, given large withdrawals over 9–31 March 2018.
As we move out of the heating season, the market will require more demand from the power sector to balance. The 5% fuel switch trigger remains the anchor that the market will revert to for both prompt and summer 2019-delivery contracts. The trigger fell last week and closed at 16.85 €/t, given w/w falls in carbon (7.2%) and coal (1.0%). While this is a far lower fuel switch trigger than seen historically during a winter month, the price move has had little effect on gas demand from the power sector so far in February. Rather, power sector gas demand has been weaker y/y mainly because of lower aggregate power demand (due to the mild weather) and higher renewable generation, most notably in the UK and Germany. Over 2018, the EU added 11.7 GW of wind and 8.0 GW of solar capacity, which will help to continue to shrink the call on thermal, with gas needing to take market share from coal-fired generation.
We expect that EU carbon will continue to explore a new trading range bound by technical indicators at 18 €/t and 21.3 €/t for the coming weeks, at least until Brexit uncertainty is resolved. We see Cif ARA prices featuring some degree of stability in the coming weeks, holding in a range around 70 $/t, as weak coal fundamentals are somewhat offset by strength in oil. As such, the 5% trigger should move in a tighter band this week, staying around 16.85 €/MWh, barring any big moves in the prices of related fuels. The most obvious potential upside comes from any change in weather forecasts towards colder weather, but even then, price upside is likely to be limited.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|