The European gas market has started to reprice back down to levels we expected for the summer, following a price surge in the first week of April. The failure to reduce the y/y storage deficit so far this month suggests bearish price pressure is on the cards for the months to come.
An exceptionally warm wave of weather across Northwest Europe over the last few days erased any hope that an early spring boost in res-com demand could help balance the very loose EU gas market. While the ending of the heating season was bearish, April 2018 was also much warmer than normal, helping keep the y/y loss in res-com demand smaller than it would have otherwise been against a seasonally normal base.
Incremental LNG supply continued to outpace any y/y drops in pipeline supply. Given expected LNG supply of 0.21 bcm/d this week, NW Europe looks on course to make another strong stockbuild, of 2 bcm (+0.35 bcm y/y), widening the y/y storage surplus back to its start-of-April peak of 25.3 bcm. We should then return to narrowing the surplus, but progress appears slow, with a forecast injection of 0.9 bcm in the week to 3 May, just 0.11 bcm less y/y. Storage injections could be even higher that week if we see stronger-than-average wind generation, as we have through most of the year because of added wind generation capacity.
If Europe does not make significant progress in whittling down its storage surplus this month, as looks increasingly possible, that task will be just as difficult in May given an expected soft supply-demand balance. May is the month in which Norwegian maintenance constraints are the lightest y/y across the summer (1.18 bcm, 0.30 bcm lower y/y). At the same time, May is still a shoulder month, promising little hope for an uptick in Asian cooling demand to soak up global LNG supply. In the months before the JKM May-19 expiry, the JKM-TTF spread for that contract consistently priced higher netbacks to Europe than Asia for US LNG cargoes.
The w/w flatness in carbon and coal has meant the TTF fuel switch triggers have not really shifted, with the 5% trigger at 14.1 €/MWh, which is now where the May-19 contract is trading. With gas prices easing, coal is unlikely to see much support despite the strength in Brent given the news that US waivers for sanctions on Iranian crude will end. Carbon remains in the grip of another speculative run, although the stability of last week and a return to higher auction volumes this week suggests further upside could be limited this week. With stability in coal and carbon, the TTF has likely found its mean, which is the one we had been expecting the market to revert to once the heating season ended, pointing to smaller w/w TTF losses than seen over the last two weeks.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|