There has been no respite for the bearish sentiment in European gas markets. An outright, if small, storage build in early March in NW Europe took the y/y inventory surplus to 19 Mt, leaving the market on track for an end-March carryout of 41 bcm (24 bcm higher y/y). Such a high carryout spooked the market, causing both the TTF and NBP to trip downwards last week. The Apr-19 TTF contract closed Friday (8 March) at 16.7 €/MWh, down by 3.4% w/w.
The high storage carryout could mean an oversupplied market struggling to balance this summer. NW Europe made a rare early March stockbuild of 0.1 bcm in the week to 8 March, although total European stocks fell by a small 0.19 bcm. The lack of storage draw occurred in a market that is very well-supplied, which has pushed the prompt to trade below the summer 2019-delivery contracts, incentivising the market to keep gas in storage. With LNG sendout expected to rise strongly y/y over the rest of March, it is even possible that NW Europe will make stockbuilds if forecasts of a mild end-March come to fruition. Even if res-com demand is normal or higher than average, windy weather could mean that high renewable generation will dent power sector gas demand, leaving storage injections as a key March balancing mechanism.
In relative terms, the fall in TTF and NBP prices made gas-fired generation even more competitive in the power sector. While coal also came off by 3% w/w, carbon had a stronger week, adding 3.3%. The w/w softness in gas has meant that the market has dropped away from the 5% fuel switch trigger (where a gas-fired plant with just a 5% efficiency advantage is in merit over a coal-fired unit) and is approaching the parity trigger (where a gas plant with no efficiency advantage over a coal unit is in merit), which is at 16.2 €/MWh. While this promises some additional gas demand this summer, up to 8 bcm y/y, that still leaves a lot for the market to do to balance.
We expect that balance will come from gas injections—we forecast storage will end the 2019 injection season 11 bcm higher y/y, meaning EU working storage will be completely full—and that supply will have to ease. With LNG forecast to add at least 10 bcm y/y over the summer, supply declines are likely to come from the UK, the Netherlands, Norway (maintenance-led), Algeria and Russia. On a volumetric basis, Russia is the hardest to call as the y/y reduction in nominations in February was largely offset by additional gas sales on Gazprom’s Electronic Sales Platform (ESP).
While hitting the fuel-switch parity trigger should provide some support for gas demand in the summer, continued selling by Gazprom into the ESP could see prompt prices begin to break below that level.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|