The second half of last week saw a somewhat unexpected rise in prices at the main European gas hubs, after a steady three-month period of falling prices. The TTF May-19 contract closed at 16.6 €/MWh on Friday (5 April), up by a whopping 20.2% w/w. The surge in prices came amid a mini-storm of bullish drivers. The EUA market jumped as Brexit news suggested the possibility of a long extension to the UK’s exit deadline. The carbon market gapped upwards from Wednesday onwards and delivered a 14% w/w gain by Friday’s close, which gas was happy to follow. Weather forecasts started to suggest some early spring cold weather in Europe, while some seasonal drops in supply from both Russia and Norway started to become evident. Last, an upward jump in a market that was structurally short would have triggered a number of stop losses, and the ensuing short-covering would have just provided further upwards momentum.
Despite the rise in prices, a loose supply-demand balance did see the total European storage surplus y/y rise further to 25.3 bcm by 6 April. The forecast colder weather and the slowdown in some pipeline flows mean that the surplus should shrink to 23.6 bcm by 20 April. That still leaves a lot of work to do over the summer to get the storage surplus down to the 10-12 bcm surplus that current European storage capacity will support when it is full.
The drop in Norwegian flows was limited to the Langeled pipeline, suggesting that the slump was the result of Equinor opting to turn down production at Troll. Flows did rebound over the weekend but have remained broadly flat y/y. We do expect that flexible Norwegian supply will be lower y/y this summer, with the heavier maintenance schedule y/y unlikely to be offset by any ramping up of Troll gas. The incremental impact of a y/y Troll turndown is likely to be most noticeable in April, when Troll output was especially strong at 0.11 bcm/d in April 2018, but will diminish by June, when Troll flows slowed to an average of 77 mcm/d in June 2018.
The result of last week’s upward repricing is that EU hub prices are now trading well above the 10% fuel switch trigger (now at 15.8 €/MWh), which is at the top of the range in which we expected the 2019 summer strip to trade. With the shorts getting burned last week, though, it may take a number of sessions for the summer’s still-loose fundamentals to filter back through to curve prices and deliver more coal-to-gas fuel switching. Until then, the market could trade fairly technically and that means some temporary upside cannot be ruled out.
The gas market will keep an eye on where European carbon prices go and we do think that if the UK crashes out on Friday with a no-deal Brexit, both carbon and gas will lose all of the gains posted last week and probably more.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|