Weather forecasts indicate that Northwest European weather will remain colder y/y for at least another week, giving the region a much-needed demand boost to soak up supply and curb injections. Still, with Q2 19 halfway over and Europe beset by a massive 24.5 bcm y/y storage overhang, gas prompt contracts fell during trading on Monday (13 May), with the TTF Jun-19 changing hands just above the 5% fuel switch trigger (now at 13.7 €/MWh), the level at which we expect summer gas prices to prevail.
With coal and carbon prices likely to trade in a flatter range in the coming months, gas fuel switch triggers should see less movement as well. But we do see some relative downside, with the TTF Jun-19 contract likely to need to drop by another 30 cents/MWh or so to push more gas into the power sector. Colder weather and high power demand will help NW Europe curb injections in the week to 17 May, but as the region then returns to seasonally normal weather and online French nuclear capacity increases further y/y, narrowing the storage overhang will become even more difficult. We forecast the y/y overhang at 23.5 bcm heading into the last week of May, leaving plenty of work to be done over June-September to reduce the surplus.
Europe’s summer objective is clear: the region must cut the y/y storage surplus to no more than +12 bcm before winter, which would place stocks broadly at capacity. The outlook for the coming winter season remains much more difficult to call, given the uncertainty surrounding possible Nord Stream 2 (NS2) delays. The market will need to carefully watch progress on Ukraine-Russia negotiations. If negotiations drag into Q3 19, the market could start to get anxious about the potential for Q1 20 to have neither NS2 nor Russian gas transiting Ukraine. If that happens, then the Q4-19-Q1-20 spread would start to blow out, with prices needing to signal that market participants should keep gas in storage as much as possible. So the EU market is facing a winter 2019-20 that could be anything from comfortably relaxed (given there will be some 12 bcm or so more gas in storage at the end of October) to very tight.
The winter premium has stayed around 5 €/MWh, with the Sep-19-Nov-19 spread averaging 4.9 €/MWh over last week. We expect the Sep-19 contract to drop to the 5% fuel switch trigger and the winter contracts to fall to the 15% trigger. However, to get a material narrowing of that spread is going to be difficult. Rather, if the risks of a difficult winter grow, which would be driven by no agreement on Ukrainian transit this quarter, that spread could actually widen out. Even without that risk, the respective two triggers we expect to hold as means for the summer and winter contracts do suggest a mean spread of close to 5 €/MWh. 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|