Next week's edition of European Panorama will be published on Tuesday 28 May, owing to the UK bank holiday.
The somewhat belated end to the heating season last week has allowed the TTF prompt to soften and that has finally stimulated the downward repricing on the curve that had been our mantra for a while. The Jun-19 contract did not just drop down to the 5% fuel switch trigger, it dropped below it, as the market faced up to the fact that there is still a lot of y/y storage overhang to clear and the longer the storage surplus stays, the fuller those storage facilities are getting.
Europe did make some progress on cutting its massive y/y storage overhang last week, narrowing the surplus to 23.6 bcm, 1 bcm less w/w. We expect that the overhang will continue to shrink over the next two weeks, although both supply and demand fundamentals face headwinds. On the supply side, LNG sendout is set to ramp up after last week’s dip, owing to the end of maintenance at some French terminals. With incremental LNG supply rising back into its impressive 0.18-0.21 bcm/d range that we have seen for most of the summer, the supply focus will need to shift to watching whether Norwegian, Russian and Algerian flows dip in response to weak prices.
On the demand side, there will be less thermal generation demand owing to a large rise in available French nuclear capacity. Last week’s 37 mcm/d jump in power sector gas demand was one of the most impressive weeks for the coal-to-gas switch across NW Europe, but the ability to sustain all of those gains could be difficult, with higher renewable generation expected. The one source of support for thermal could come from hydro generation. As of Monday morning, the French hydro balance tightened, but it was still 5 TWh below the seasonal norm.
With the EU gas market pricing down so much last week that the fuel switch looks economically attractive, the TTF could now be in for a period of more sideways trading. With coal seeing some resistance at 60 $/t to further downside and carbon now trading in a range between 24-28 €/t, the fuel switch triggers should be a bit more stable and the only question is do storage concerns drive the market to the parity fuel switch trigger, which is currently way down at 11.1 €/MWh. We think the summer 2019 curve will stay closer to the 5% trigger (now at 13.3 €/MWh) on average, so potentially less directional trading although the prompt could still see period of weakness.
The Q3 19-Q4 19 spread widened by 74 cents/MWh w/w, to close Friday at a very wide -5.48 €/MWh, as the market is starting to get concerned over Russia-Ukraine discussions to deliver a new gas transit agreement. The continued failure of Gazprom and Naftogaz to even go to the negotiating table should encourage those spreads to stay wide.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|