The underlying bearish summer fundamentals weighing on continental Northwest European gas markets show no sign of abating. The weakness in the TTF has already seen prices push below the 5% fuel switch trigger and has closed the TTF-Henry Hub arb window for the Jul-19 and Aug-19 contracts. Steep contango remains in the summer 2019-winter 2019/20 spread, which is keeping the TTF-Henry Hub Sep-19 basis open. However, Q3 19 balances look weak as a failure to make headway on closing the y/y storage gap in May puts more pressure on the remaining summer 2019 contracts. With Q3 19 supply set to be supplemented by higher LNG inflows (+6 bcm y/y set to arrive in Europe) and pipelines not turning down fast enough, more gas will need to go into power. We forecast that France, Germany and the Netherlands will need to raise power sector gas demand by around 4.6 bcm y/y in Q3 19, thus realising most of the fuel switching possible in those countries and pointing to continued downward pressure at the TTF in the coming months.
Q3 19 will test how much of the potential fuel switch Northwest Europe can achieve given historically low relative prices. We forecast that the bulk of the increase y/y in power sector gas demand in Q3 19 will fall to Germany (maximum +3.5 bcm), followed by the Netherlands (maximum +1.6 bcm) and then France (maximum +0.3 bcm). Achieving even a 4.6 bcm switch, 85% of the maximum total potential given transmission constraints and the need to manage peak summer demand peaks, will be an achievement. Even with supportive relative fuel prices, higher nuclear, wind and solar generation pose a headwind to the region using more gas in power. French nuclear capacity, which is expected to grow by 1–4 GW y/y each month across the rest of the summer, has already helped shrink the call on thermal generation.
Wind power generation should grow y/y due to higher installed capacity, but solar will struggle to make y/y gains despite capacity additions thanks to a high base from last year’s warm and sunny summer. And while seasonally low hydro balances across France, the Alpine region and Italy had previously been supportive for gas-fired output in early summer, hydro levels have recovered somewhat in May. Across those three regions, the hydro balance is about 2.3 TWh below the seasonal norm, although that masks a bigger deficit in France (-6.0 TWh lower y/y and the seasonal norm) being somewhat offset by comfortable Swiss and Austrian balances. The total call on thermal generation is likely to be lower, so more gas burn will have to come from the majority of the potential coal-to-gas switch taking place—and that is only going to happen when TTF prices drop to the parity trigger, which is currently at 10.2 €/MWh.
|Fig 1: EU fuel-switching at the prompt €/MWh||Fig 2: TTF forward curve, €/MWh|
|Source: Refinitiv, Energy Aspects||Source: Refinitiv, Energy Aspects|