European gas markets got a little respite last week from the extremely bearish sentiment of the week before, with weather forecasts promising a return to more normal temperatures after an unseasonably warm February. Support also came from the related fuels markets, with European coal and carbon both posting gains.
Despite the strength in related fuels, the TTF M+1 closed Friday largely flat at 17.3 €/MWh (-0.3% w/w). The modest response to the move in competing fuels did mean the TTF fell by more in relative terms and is now trading along the summer 2019 curve below the 5% fuel switch trigger. That trigger closed last week higher by 1.4 €/MWh w/w at 18.26 €/MWh and also saw the parity trigger (where every last ounce of coal-to-gas switching should be squeezed out of the market) push up to 16.15 €/MWh. By the close of the week, the market was pricing almost halfway between these two triggers.
The relative softness in gas pricing was certainly encouraged by the paltry storage draw of just 0.9 bcm over last week, which pushed the y/y storage surplus out from 11.8 bcm to 16 bcm y/y. There should be one month more of storage withdrawals, and weather forecasts for the first two weeks of March look significantly warmer y/y. With a potential y/y surplus of almost 20 bcm by the middle of March, the market is looking at some soft balances, and we certainly cannot rule out summer 2019 mean prices at the parity fuel switch trigger. The increasing amount of renewable capacity is also directing the gas market towards the parity trigger. While more normal weather should help push res-com demand higher w/w, exceptionally high wind generation this week will put a sharp dent in power sector gas demand, possibly leading Northwest Europe to post a rare early March stockbuild. Given current weather forecasts, we forecast that the total European storage overhang will be just under 20 bcm higher y/y by mid-March. We also see an end-of-March storage carryout 23 bcm higher y/y.
Given the weakness in the balances and some headwinds to expanding power demand, gas prices could well start to slip to the parity trigger as the storage surplus rises above 20 bcm y/y. The seasonal contango still looks strong, with the TTF Sep-19–Nov-19 spread at -3.09 €/MWh compared to -1.4 €/MWh at the start of the year. While that does reflect the expected loose balances over summer, it also suggests plenty of economic incentive to inject into storage and supports our expectation that end-October storage carryout is going to be much higher y/y by at least 10 bcm. Still, as we move through the summer and approach the start of winter 2019–20 with stocks relatively full, some winter risk should decline and encourage that spread to start to narrow from where it is now.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|