Weak demand and ample LNG supply led NW Europe to draw a paltry 5 bcm from storage in February, leading Europe to end February with a 15 bcm y/y storage surplus. An expected loose supply-demand balance in March would put the end-of-winter storage overhang at about 23 bcm, cutting summer injection demand sharply and making coal-to-gas switching the main way the market can balance. Headwinds to a sharp rise in gas demand will come from higher renewable and nuclear generation. A supply response may occur in the form of a drop in Norwegian supply (heavy maintenance in Q3 19) and a fall in gas nominated under long-term Russian contracts, although how much Gazprom looks to offset that fall by selling prompt-delivery gas on its new sales platform will be key.
Aggregate gas demand across continental NW Europe dropped by a massive 5.3 bcm y/y last month, as the region experienced the mildest February in at least the last 11 years, compared to an unusually cold February 2018. Given that most weather forecasts had been indicating a milder February y/y, the decline in res-com demand was not a surprise, although the y/y change in HDDs meant that the incremental drop was particularly large, at 4.8 bcm (27%). More notable was the 0.3 bcm (17%) y/y fall in power sector gas demand, which was particularly striking given that gas prompt prices dropped steadily through the month, falling to the price level where nearly all gas-fired generation is in merit over coal-fired units.
February has provided a preview of one important demand-side price driver heading into the summer: renewable generation. Robust supply and a much higher y/y storage carryout at the end of March mean that the market is having to stimulate an even higher demand-side response to balance. February cash prices were already suggesting that Europe was trying to push more gas into its power sector. Germany, in particular, had the most potential for fuel switching, with some 8.3 TWh of hard coal-fired generation in February 2018 that could be replaced by gas-fired output. Yet even with falling gas prices last month, German gas-fired generation fell by 1.2 TWh y/y (22%) while hard coal dropped by -2.1 TWh (25%), with both driven by a 3.3 TWh (32%) rise in combined solar and wind generation. Prices for March cash and along the curve are trading at levels that put nearly all gas-fired generation into merit, providing an opportunity for coal-to-gas fuel switching to stimulate a maximum 1.9 bcm y/y rise in March power sector gas demand across the region. If renewable generation stays strong and some stickiness in coal-fired output continues so that little concrete increments in absolute power sector gas demand occur, then the downward force on NW European hub gas prices will remain.
|Fig 1: EU fuel-switching at the prompt, €/MWh||Fig 2: German wind & solar gen, TWh, y/y change|
|Source: Reuters, Energy Aspects||Source: Fraunhofer, Energy Aspects|