The European winter ended with a whimper last week, as total European stocks finished the season a massive 24.7 bcm higher y/y. While such a surplus had been on the cards ever since the mildness of February, the storage surplus could widen even more over the next two weeks as the market needs to absorb the flows of LNG and the spot sales coming from Gazprom.
If there is a month this summer in which gas price lows will be tested, April is the prime candidate. We are several months away from peak cooling season in Asia, and plentiful stocks in that region mean that at least for the first half of Q2 19, the burden of soaking up global LNG supply continues to fall to Europe.
The next few weeks will provide a test of how well the European demand-side response functions. Some of the themes that drove winter prices will remain key, mainly the strength of renewable generation, and how much that curbs thermal demand. Although NW European prompt prices sank to multi-year lows in March, power sector gas demand remained relatively weak, owing to high wind generation. In Germany, coal-fired generation produced just 8% of total generation in March, a three-year low for the time of year. However, despite some low relative gas prices, German gas-fired output in March fell to a four-year low, as thermal generation was brought lower by wind generation hitting a record high 39% share of generation.
On the supply side, the biggest April uncertainty will be the level of selling on Gazprom’s Electronic Sales Platform (ESP). High stocks would normally lead to a reduction in Russian nominations in the summer, but in March, Gazprom offset nearly half of the approximate 1.5 bcm drop in long-term contract flows with 0.67 bcm of spot ESP sales. So, while we can expect Russian flows to continue to ease y/y this month, that supply-side response is being dulled by sales on the ESP.
Last week did see more of the race to bottom in prices, with coal shedding 7% w/w to hit 61 $/t on Friday. Gas and coal are now chasing market share and the question is now how low can coal go? While 60 $/t for Cif ARA seems low, particularly with oil nearing 70 $ per barrel, at some point Cif ARA will need to stop falling on a cost basis. Carbon remains volatile, and is as likely to provide upward pressure on gas as it is downward pressure. While TTF prices are currently trading around the 7% fuel switch trigger, we expect we could see downward movement to the next big coal-to-gas trigger, at 5%, which at current relative prices is at 13.1 €/t.
The market still has seven months to reduce the size of the surplus to a maximum of 10-12 bcm, which would leave EU storage full at the end of October. The longer it takes to get onto a trajectory that delivers that reduction, the more bearish it will be.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|