NW Europe is starting the injection season with an impressive 18.3 bcm y/y storage overhang, meaning the market will be trying to get that down to no more than 6.5 bcm higher y/y by end-October. We should now start to see the storage overhang shrink through a combination of y/y pipeline supply losses and higher power sector gas demand. Some of the price uplift we saw last week is likely to recede, as part of the momentum was caused by a flurry of short-covering and pricing seems to have become a bit more technical. The supply-demand balance for this summer remains loose, and TTF prices will need to drift back down to the 7.5-to-5% fuel switching triggers to get sufficient gas into power to balance. Getting that power sector demand response is made harder by the significant y/y increases in renewable generation, particularly wind.
The bearish fundamentals that coloured the first half of Q1 19 continued through March, with weak demand and large incremental increases in LNG supply feeding a burgeoning y/y storage surplus. Europe ended winter 2018 with a 24.6 bcm y/y storage overhang, with a combined 18.3 bcm of that surplus in NW Europe’s markets of Belgium, the Netherlands, France and Germany. Current weather forecasts indicate colder weather y/y in April, so some early spring heating demand will also help shrink some of the surplus. The rest of the work in whittling down the storage overhang to a manageable 6 bcm in this region by end-October, which would place end-summer stocks at capacity, will need to be achieved through a combination of higher demand through coal-to-gas fuel-switching and lower y/y pipeline supply.
In terms of getting higher y/y power sector gas demand, Q1 19 has already shown the market that strong renewables can pose a challenge for growing power sector gas demand. In particular, the high level of wind power generation over Q1 19 (up by some 9.0 TWh) has meant y/y increases in gas-fired generation have yet to take hold, with gas generation managing to post only a 1.4 TWh y/y gain over the quarter.
While wind and solar will play important roles in determining the call on thermal, so will hydro, with a very different hydro summer starting to shape up. Nordic hydro levels have made a quick late winter recovery, and while the region’s hydro balances are still below normal, they are only around 5.9 TWh below normal. This marks a vast improvement on last summer, when that balance was some 20 TWh below normal. Alpine hydro, so healthy last year, looks to be around 9.5 TWh below normal, with big deficits in France and Italy not being offset by more modest surpluses in Swiss and Austrian balances. While those hydro balances do not translate one-for-one to a reduction in generation in a season, they do point to hydro at best being a little more supportive of gas burn over the coming six months.
|Fig 1: EU fuel-switching at the prompt, €/MWh||Fig 2: German renewable and gas gen., TWh, y/y|
|Source: Refinitiv, Energy Aspects||Source: Fraunhofer, Energy Aspects|