European gas

Published at 14:58 11 Mar 2019 by . Last edited 11:18 22 Aug 2019.

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

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