The TTF is giving the appearance of settling into a more stable trading range, but this period does feel like the calm before the next downward pricing storm. The prompt has been more stable due to the colder-than-usual start to May, which has helped keep the summer 2019 contracts from falling and trading just above the 7.5% fuel switch trigger sitting at 14.6 €/MWh. While we have started to see some higher power sector demand due to lower relative prices, the concern of the gas market now needs to be on storage levels.
Instead of cutting down the y/y storage surplus, April saw the y/y surplus widen. European stocks were 25.6 bcm higher y/y on 4 May, an intimidating amount given that storage would be full to capacity if the y/y surplus is just 12 bcm by the end of summer. Colder-than-average weather will help narrow the surplus this week—we forecast a NW European stockbuild of about 0.94 bcm, nearly 1 bcm lower y/y.
Weather forecasts are calling for below-average temperatures for most of the next 10 days, against a very low base of HDDs in May 2018. However, as absolute temperatures begin to trend upwards, cooler-than-normal weather will provide less demand impact and the power sector will be forced to shoulder more of the burden of absorbing ample supply.
The supply side is another headwind. LNG sendout is now consistently posting y/y increases, in an impressive range of 0.11-0.15 bcm/d. Gazprom sales on the Electronic Sales Platform (ESP) are also partially offsetting the natural decline in nominations that we had expected to see, with sales on the ESP in April at 0.8 bcm. Still, the storage overhang does need to start to come down at some point. The later in the injection season this happens, the greater the associated downward price pressure will be on the remaining summer 2019-delivery contracts. Greater power sector demand for gas will require lower gas prices relative to coal, and we still expect the mean TTF spot price to be around 13.4 €/MWh (the 5% fuel switch trigger) this summer.
The market continued to trade with a high level of seasonal contango, largely a reflection of high winter prices, with Dec-19 closing Monday at 21.1 €/MWh, well above the 15% fuel switch trigger (18.5 €/MWh) where we expect the winter to price. While falling winter prices in the coming months should narrow the contango, we are also calling for summer 2019 contracts to trade down to a lower fuel switch trigger. As such, to get material narrowing of the Sep-19-Nov-19 spread is going to be a challenge. The respective two triggers we expect to hold as means for the summer and winter contracts suggest a mean spread of close to 5 €/MWh (near current levels). At this wide level, the storage gap is going to have to be eroded despite the recurring incentive to inject.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|