European gas

Published at 15:11 18 Mar 2019 by

The question on many lips right now is: how low can the European hubs go this summer? EU hub prices have opened the week soft on a microcosm of the key factors that have been colouring the European gas markets over the last six weeks. The 14-day weather forecasts, from both EC and GFS, now call for consistently warmer than normal weather in that period. Add in current weather being unsettled and wet, adding to wind and hydro generation, and the headwinds to gas demand growth become apparent.

Last week saw a bigger-than-expected stockdraw of 0.55 bcm (amid windchill factors making the weather feel colder than indicated by the thermometers), though that draw was still 0.9 bcm lower y/y. As a result, the y/y storage surplus began this week at 20.3 bcm and is now on track for an end-March carryout of 41 bcm (+24 bcm y/y). Such a high carryout remains a key reason for market softness, with prompt month (Apr-19) way down at 15.3 €/MWh this morning.

This weak pricing was also informed by EUA carbon prices shedding some 0.75 cents and coal fell last week to just above the 70 $/t level—all helping to push the parity fuel switch trigger down to 15.3 €/t. While the TTF has headed below that to just under 15 €/MWh, most of the demand-side response that the EU gas markets could see from getting gas cheaper than coal will come in markets where gas is priced at a premium to the TTF. As such, that switch requires NCG, Gaspool and PSV to hit that parity level, and with NCG trading with an average M+1 spread of 0.65 €/MWh (over last 30-days), the TTF may need to fall still further to drag down all of the basis markets far enough. With this summer promising to deliver all of the potential coal-to-gas switch Europe has to offer, we might see summer 2020 having even more balancing issues.   

While healthy LNG is providing the obvious supply weight pushing hub prices down, another key factor in the summer balances is Gazprom. As we argued in the outlook (Europe Outlook: Tank tops, 14 March 2019), over February we have seen a fall in nominations under Gazprom’s long-term contracts being offset by aggressive selling on the electronic sales platform (ESP). As this largely involves replacing sales that would have happened under a hub-index with sales requiring a discount to the hub, Gazprom has clearly started to prioritise sales volume over sales value. In March so far, Gazprom exports are down by 0.26 bcm y/y, but total ESP selling is up to 0.55 bcm.     

It is hard to see exactly where the market will find support. European coal seems poorly bid, as the gas-to-coal switch is economic, while European carbon is being buffeted by Brexit uncertainty. We think CO2 prices are likely to trade in a fairly wide range (18–25 €/t) over the next month, but they could move back to the top of that range provided a no-deal Brexit is avoided. If a no-deal Brexit occurs on 29 March, expect EUAs to plunge and take the TTF and NBP with them.

Supply-demand outlook and storage forecast for NW Europe, mcm
Source: Country SOs, GIE, Energy Aspects

Log in to download

Other Europe publications

September slump

Published 1 day ago

2019-08-19 Natural Gas - Europe - September slump cover
Europe is poised to enter September with a massive 18.5 bcm y/y storage overhang, making it look..

Read more

Norway

Published 4 days ago

2019-08-16 Natural Gas - Europe - Norway cover
Norwegian gas production was 0.9 bcm lower y/y at 9.5 bcm in July. Annual maintenance was schedul..

Read more

Supply slowdown

Published 1 week ago

2019-08-12 Natural Gas - Europe - Supply slowdown cover
Unplanned North Sea production constraints, the biggest y/y drop in Russian supply this summer on..

Read more

Northwest Europe

Published 1 week ago

2019-08-09 Natural Gas - Northwest Europe cover
Europe has begun August with a steep rally in gas prices, just like July, although this month’s p..

Read more

NBP

Published 1 week ago

2019-08-08 Natural Gas - Europe - NBP cover
Please note that users licensed for the data service can access our UK gas balances by..

Read more