The fall in European gas prices came to an abrupt end in the tail of last week, with prices rising on a slowing in LNG sendout and pipeline flows. However, the market balance actually got looser. With the y/y storage surplus growing to 24.5 bcm on 8 June, from 23.8 bcm a week earlier, it seems premature to call an end to the long slump in flat prices. Rather, most of the key pricing metrics still point to further downside, with the TTF-Henry Hub arbitrage window only starting to close at 11.4 €/MWh, the coal-to-gas fuel switch only being exhausted at 10.1 €/MWh, and incremental Russian supply only being discouraged at 9.8 €/MWh. With all prices on the TTF summer 2019 curve above those points, the fundamentals are still pointing to further downside for prices.
While fundamentals still seem bearish, a rally in carbon and a slowing down in pipeline imports and LNG sendout did provide some support to EU gas hub prices, with the TTF Jul-19 closing the week at 11.58 €/t (+2.8% w/w). After two weeks of heavy losses, the end of last week’s rally did also suggest some profit-taking on the summer 2019 contracts.
Convergence of pricing points
Despite a little rally, the EU gas market’s key pricing metrics that point to how the market might balance this summer are all still lower than prevailing prices. The gas market still needs to encourage all of the coal-to-gas switching that is available. This means that the TTF must get to the parity fuel switch trigger (where gas-fired generation with no efficiency advantage over coal-fired generation is in the money), and the basis spreads between the TTF and the Southern European markets have to narrow. Last week, EU storage built further, with the y/y storage surplus widening to 24.5 bcm, heading in the wrong direction, towards where there will be no spare injection capacity left. With the coal-to-gas switch potentially encouraging as much as 7.0 bcm y/y of added demand over Q3 19, and given the market will likely need all of that to balance, gas prices likely will have to head to the fuel switch parity trigger. That trigger is down at 10.1 €/MWh (3.3 $/mmbtu), given current soft Cif ARA prices at 53 $/t.
The market still needs supply to be curtailed and that could come from either LNG or pipes. In terms of LNG, TTF prices for Aug-19 (12.15 €/MWh, 4.0 $/mmbtu) mean the TTF to Henry Hub spread has reopened and is back supporting the lifting of US LNG for export to Europe. The opening of the arb came as the TTF added value back and the Henry Hub Aug-19 contract softened 0.13 $/mmbtu w/w to 2.3 $/mmbtu by Friday close, so that closing that arb would require Aug-19 trading down to 11.4 €/MWh.
At that point, the most marginal of US cargoes would be out of the money, although plenty of market participants could have lower variable costs (if they have fixed shipping costs or long-term regas capacity). Also, the Southern European markets are still trading at a big premium to TTF and the arb to Spain and Italy for US gas remains wide open even through to the M+3 contract. Also, Cove Point cargoes will still be in the money, given the shorter voyage versus the Gulf of Mexico facilities and the 40 cent/mmbtu or so discount that the Leidy hub tends to trade at to Henry Hub.
A key reason why the market has been unable to reduce the storage overhang is that Gazprom has been heavily selling gas on its Electronic Sales Platform (ESP). In May, those sales were above 1 bcm per month for the first time and volumes have increased m/m despite the deteriorating price environment. At some point, Gazprom will see those sales earning less than the delivery costs, and incremental sales will need to be curtailed at that point. We estimate that the variable cost of Gazprom’s gas going to the Slovak border (Velke Kapusany) is around 9.8 €/MWh (3.2 $/mmbtu). While Gazprom has been happy to drive EU hub prices lower, we do think that will have to stop if prices do indeed fall that far.
Pipeline starting to slow (a little)
TTF near-curve prices are currently below the 5% fuel switch trigger (12.0 €/MWh) but above the parity fuel switch trigger (10.1 €/MWh). While the previous week did see prompt prices touch the parity trigger, effectively maximising European coal-to-gas fuel switching, the recent move back up in prices did arise due to a drop in supply. However, that drop-in supply was quite limited, with total Norwegian flows around 11 mcm/d lower d/d on Friday but not significantly different y/y, and almost all of that drop was focussed on supply to the UK. Over the last week as a whole, Norwegian exports to EU markets were actually up by 0.17 bcm y/y and each day’s flows did come in higher than the daily average flows recorded over May. As such, there is little data to suggest a more structural turndown in Norwegian supply just yet.
In terms of maintenance, scheduled Norwegian maintenance in June is largely unchanged in both m/m and y/y terms. So, it will be a surprise to see Norwegian exports significant fall in y/y terms this month. However, there should be a reduction in Norwegian production in Q3 19, with all months that quarter scheduled to feature more maintenance y/y. Over the quarter as a whole, that extra maintenance adds up to 3.8 bcm (42 mcm/d) of potential production being lost y/y. With the summer 2019 contracts trading at around a 4.5 €/MWh discount to summer 2020, we expect all of that production will be lost as there is little incentive to ramp-up Troll or Oseberg production to offset the maintenance impacts.
Last week did see a more significant y/y drop in Russian flows, which fell by 0.29 bcm. While previous months (March and April) did record aggregate reductions, the drop last week was bigger than we have seen on a weekly basis this year and if sustained would allow a 1.2 bcm y/y fall in Russian supply over June. We have been expecting Russian nominations to fall, given less need for storage injections this year, but heavy selling on the ESP has so far kept any supply reductions to a minimum. Selling of short-term gas on the ESP in June has already been quite heavy, with 0.98 bcm already sold for delivery. For Russian flows to fall, there will need to be a bigger drop in nominations than we currently have been seeing.
LNG supply is starting to slow
As the US arbs are still open, the EU market will largely be accepting of all of the gas that the global market has available for it. Our global balances did have April and May as the peak months for receipts, followed by a reduction in the amount of incremental supply as we proceed through the summer. The slowdown in LNG imports is starting to be seen in the EU market.
We expect LNG sendout in Northwest Europe to trend at 0.12 bcm/d in the next two weeks to 21 June. Although still significantly higher y/y by 75-80 mcm/d, it is a far cry from the 0.26 bcm/d highs in April and May. The slowdown in LNG sendout has been led by UK terminals, with South Hook flows now a mere 11-12 mcm/d and Dragon LNG not having sent any gas into the grid since the start of the month. Lack of storage capacity, quicker Norwegian flows and stronger UKCS output on lighter maintenance y/y has driven the NBP to trade at a discount to continental hubs while discouraging uncommitted cargoes to unload. While UK port receipts are to shrink y/y by 0.2 bcm in the week to 14 June, higher continental hub prices are still attracting cargoes, with French and Dutch ports set to receive 0.6 bcm and 55 mcm more y/y.
Slower LNG sendout will allow the European storage overhang to narrow in the next two weeks. Following last week’s strong 1.7 bcm injection, our model suggests flows into storage will slow down y/y slightly, bringing the storage overhang to 24.5 bcm by 8 June then 22.2 bcm by 22 June.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|