The narrative around European gas markets has continued to feed the bearish summer story with a far milder-than-normal February leaving gas in storage up by 15 bcm y/y. By 9 March, mild weather had seen that y/y overhang grow to 19.4 bcm. While March weather is looking unsettled, the bias to above-normal temperatures suggests the end-March storage carry could reach 24 bcm higher y/y.
Incremental LNG is still going to come into Europe despite lower injection needs this summer. Our global balances suggest that Europe will take 10 bcm more LNG y/y this summer, although some of that is biased to a much stronger Q2 19 (+7 bcm y/y) than Q3 19 (+3 bcm y/y). While an incremental 10 bcm is a considerable volume of gas, that is still a somewhat conservative view given that 2.6 Mtpm of new supply capacity was added in H2 18, but it does reflect assumptions of higher summer maintenance at Sabine Pass and some delays (i.e. Ichthys T2, Cameron T1) to the 1.5 Mtpm of supply due to come online this summer.
Higher stocks and LNG imports makes summer 2019 European balances 34 bcm looser y/y. The market will balance, at least partially, by getting more gas into power. TTF prices for delivery in summer 2019 are moving down to pricing at the parity fuel switch trigger (where gas-fired plants with no efficiency advantage over a coal-fired plant would be in merit), compared to the 15% trigger that largely prevailed over summer 2018. While the maximum level of fuel switch would add a maximum of 12 bcm power sector demand, the need to meet peak power demand and manage local transmission constraints mean we see EU power sector gas demand being up by some 9 bcm y/y.
With most EU hubs trading at a basis premium to the TTF, realising the potential fuel switch in those markets could well need the TTF trade all the way to the parity fuel switch trigger (at 15.8 €/MWh with coal at 70 $/MWh and carbon at 21 €/MWh) or even a bit lower.
Even with some demand-side response, achieving a balance in Europe this summer will require both more gas to be left in storage and for pipeline supply to ease back. With so much gas to deal with, including a lot of incremental LNG imports, we think storage will start the next withdrawal season very close to its maximum capacity. Our end-October storage carry projection is 98 bcm, just over 11 bcm higher y/y, and some 6 bcm higher than the previous five-year high back in 2016.
In terms of pipeline supply, we expect to see reductions in European production (both from the UK and Netherlands), Norwegian flows (which are facing a heavy Q3 19 maintenance schedule), and from Algeria and Russia. Supplies from the last two exporters will be down due to reduced storage injection needs that we expect will translate into lower contract nominations. While Algerian gas is getting less competitive given the reduction in EU hub prices, the story is far more complex for Russia. Over February, Russian gas nominations fell by almost 1 bcm y/y given lower end-user demand. However, Russian exports only fell by 0.1 bcm given the aggressive selling of prompt gas on Gazprom’s ESP. If this continues, which we think it will, the supply response from Russian flows will be muted.
Provided Cif ARA coal stays at 70 $/t and carbon around 21 €/t, we expect a summer mean for the TTF of 15.8 €/MWh. While weather risks are now low, supply-side response and the movement of coal and carbon prices are the key risks to the flat price outlook.