The summer outlook for Northwest continental Europe is looking increasingly bearish as Q2 19 progresses, with the region’s y/y storage surplus growing to 18.4 bcm by end-April. High inventory levels will put even more downward pressure on contracts extending through summer. Given the latest revisions to our global balances, we now expect incremental summer LNG supply into Europe of 16.2 bcm, up by 2.2 bcm from last month’s forecast. Much colder y/y May weather could soak up 1.3 bcm of that supply, with the rest of the balance coming from reductions in pipeline supply and prices likely having to drop down to a lower fuel switch trigger, pushing more gas into the French and German power sectors.
Two distinct dynamics that have important implications for European prices for the rest of this summer played out across Northwest continental Europe in April. First, we finally saw higher power sector demand, with around 0.55 bcm (+69%) more gas going into the power sector y/y. Several factors supported the gas into power rise: lower relative gas prices supported some coal-to-gas fuel switching, cold weather boosted aggregate power demand, a softer rate of incremental wind generation that we have seen in recent months, weak French hydro generation, and the y/y ramp up of Belgian power exports into the UK. Not all these factors will continue to support gas burn through summer, with potentially stronger renewable generation likely to be a headwind and the weather boost to power demand far from guaranteed. Still, weak French hydro looks likely to continue for a while and should be a more consistent support for new gas into power through Q2 19, before incremental nuclear capacity ramps up sharply in Q3 19.
The second dynamic that we saw in April likely has the most crucial bearing on prices this summer. We saw a solid rise in aggregate gas demand in continental NW Europe (+2.2 bcm), and yet the continental NW European y/y storage surplus still expanded by 0.3 bcm m/m to +18.4 bcm. Despite higher demand and some moderate decline in pipeline supply, heavy incremental LNG sendout further loosened the supply-demand balance. This is notable given that storage injections were particularly strong in the first half of last summer, indicating that Q2 19 provides a good opportunity to reduce y/y injection size.
The growing storage surplus in April is bearish for the TTF contracts extending through the summer, as the region will need to erode this storage surplus. Moreover, we have revised upwards our forecast for Europe’s LNG imports in summer 2019, which we now expect to be 16.2 bcm higher y/y (up by about 2.2 bcm from last month’s forecast), and while not all of that will necessarily come into the NW European terminals, much of it will.
Under current weather forecasts, May’s cold weather should soak up about 1.3 bcm of that 2.2 bcm LNG rise. While our previous balance had already accounted for a y/y rise in May gas demand owing to a return to normal weather versus May 2018’s very low HDD base, current forecasts are now indicating that May HDDs in continental NW Europe will be 50% higher y/y, supporting even more early summer LDZ demand. Our forecast suggests that May res-com demand will likely be higher by about 1.3 bcm than under normal weather conditions.
The rest of the incremental LNG supply will need to be absorbed into the European power sector, or pipeline supply will have to step down. Lighter Norwegian flows should do part of the job. While the Norwegian government recently expanded Troll’s production cap for the current gas year to 38 bcm (+2 bcm), soft prompt prices and an increasingly loose global supply-demand balance have led us to cut our summer output for Norway by another 0.5 bcm y/y to 54.2 bcm, on the expectation that Norwegian producers will find little reason to offset any of Q3 19’s heavy maintenance cuts with flexible Troll or Oseberg output. Russian supply could also step down further, especially if summer coal-to-gas fuel switching is fully realised, as we forecast that it will be in Spain and Italy this season.
The rest of the balancing act will come down to fuel switching. Low Alpine hydro balances should lend some additional support to Q2 19 French gas-fired generation, before incremental nuclear capacity really ramps up in July and August. Alpine hydro balances recovered slightly in April, but they remain 7.8 TWh below the past 10-year average, compared to the 1.5 TWh below-average level at which they began May 2018. Softer gas prices should also promote more coal-to-gas fuel switching in Germany. France and Germany are the two regions where we have revised up our summer power sector gas demand growth this month.
|Fig 1: Norwegian production, bcm, y/y||Fig 2: EU fuel switching at the prompt, €/MWh|
|Source: NPD, Energy Aspects||Source: Refinitiv, Energy Aspects|