Please find attached a revised version of EU Panorama. We had erroneously calculated fuel switch triggers and have now corrected those and the implications for prices (on page 1, 2 and Figure 8). We apologies for any inconvenience caused by the error.
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 5% fuel switch trigger down to 14.2 €/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 5% 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 much 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|