Mysterious ways

Published at 14:39 8 Jul 2019 by . Last edited 11:18 22 Aug 2019.

EU gas hubs have finally seen a few bullish fundamentals—rising coal prices, Norwegian gas production cuts, unplanned outages on the Forties Pipeline system—which had otherwise been rare this summer. However, market participants would be wise to remember that the overall picture remains bearish. There was a y/y storage overhang of just under 24 bcm on 5 July. We forecast that overhang will narrow to 22.4 bcm by 19 July, which would still be very wide. The changes to the Gassco schedule take Q3 19 maintenance back to being around 4 bcm higher y/y, close to levels published at the start of the summer. However, once coal’s bull run loses steam, TTF prices will need to move back down to achieve market balance.     

Surprise coal lift providing support

The coal market will often move in mysterious ways. The last two weeks have been extraordinary, with Cif ARA prompt contracts falling to close at 49.1 $/t on 27 June, before recovering over last week to close at 57.3 $/t. With EU coal fundamentals not really changing w/w, the move appears to be the result of wider global coal market positioning. The Asian benchmark (Newcastle) showed a broadly similar weekly price pattern to Cif ARA and there was talk in the coal market of a short squeeze in the physical and paper markets. While 49 $/t for Cif ARA seemed a very low price to be sustained, with oil hovering around 65 $ per barrel, the background is that European coal stocks at the end of June were at a two-year high, at 6.9 Mt, some 1.6 Mt higher y/y. Those high coal stocks reflect significant weakness in German coal-fired power generation.

German coal-fired and lignite-fired generation in H1 19 posted the lowest half year this decade, with coal-fired generation falling by 8.2 TWh and lignite off by 13.8 TWh y/y, according to Fraunhofer data. While the low lignite numbers were driven by a number of factors, including a fall in RWE’s generation due to mining restrictions at the Hambach Forest affecting a number of the company’s plants (a combined 7 GW at Niederaussem and Neurath), the low cost of gas and the relatively high price of carbon mean that more-efficient gas-fired plants (at 50% efficient) are in the money against older lignite plant (35% efficient). A 29 €/t EUA price would get a 45% efficient gas plant into merit against that older lignite plant based on prompt gas prices at the start of July. We are now even starting to see some lignite shut-ins, with EnBW having put its 900 MW Lippendorf S power plant into standby mode on 15 June. The company announced that the decision was exclusively market-driven as current ‘framework conditions’ make operating the plant uneconomic and the plant will stay offline until those market conditions change. With the economic attractiveness of even lignite under threat, it is hard to see any way back for German hard coal generation over Q3 19.

Despite the increase in TTF flat prices last week, the rise in Cif ARA prices pushed up the fuel switch triggers, with the parity trigger going from 9.8 €/MWh to 10.9 €/MWh w/w. With Cif ARA gains proportionally higher than the rise at the TTF, the relative competitiveness of gas in the stack increased w/w at Friday’s (5 July) close. The TTF Aug-19 was still above the parity trigger on Friday, suggesting that in relative terms gas still has room to fall. It is questionable how much longer Cif ARA summer contracts can increase in price given high coal stocks and low coal-fired generation. We think the current Cif ARA bull run is likely to run out of steam soon. As such, the upward move in TTF flat price should be short-lived and the gas market should shift back to pricing down to that parity trigger.

Fig 1: ARA coal prices, M+1, $/t  Fig 2: German monthly power generation, TWh
Source: Refinitiv, Energy Aspects Source: Fraunhofer, Energy Aspects


Gassco revises maintenance cuts back up for Q3 19

The market found some price support on Friday as Gassco updated the summer maintenance schedule again, increasing the amount of production and processing capacity expected offline to just under 4 bcm in Q3 19. In the previous week, the schedule had been revised to lighten constraints to about 3.5 bcm, from the 3.8 bcm listed in the schedule earlier this summer. Most of the revision was due to a compressor failure at the Nyhamna processing plant. The technical issue began on 27 June and the plant is set to operate with restricted capacity until 26 August. The expected constraint was revised down to 9 mcm/d by Monday morning, from 18 mcm/d on Friday. While Nyhamna processes gas from the Ormen Lange and Aasta Hansteen fields, the loss in production could be offset by raising output from flexible fields in the Norwegian Continental Shelf. With output from Troll of 0.11 bcm/d in July 2018 (just below maximum capacity), further flexibility would come from Oseberg. However, there is little incentive to boost flows with prompt prices still at a heavy discount to Sum 20.  

Unplanned outages will also cut UKCS supply this week, tightening the short-term supply-demand balance. INEOS announced this morning (8 July) the shutdown of its Forties Pipeline Systems to mid-Wednesday owing to works at a train in Kinneil. The outage will restrict UKCS gas output by around 75 mcm/d, and flows are likely to be partially restricted until 12 July. Still, European balances still look loose given the 23.9 bcm storage overhang into the second week of July. We forecast that the production cuts and stronger power sector gas demand will help curb injections y/y, slimming the surplus to 22.4 bcm by 19 July. However, another 10 bcm of surplus would still need to be unwound by the end of the injection season as storage capacity would be full with a surplus of 12 bcm y/y.

Dutch courts decide – as you were

The Dutch Council of State maintained the current gas year cap on 3 July but said that the minister of economic affairs and climate policy, Eric Wiebes, must explain more clearly how he expects to end gas extraction in the future. The Council of State argued that the government must make it clear in concrete terms why gas extraction from the Groningen field cannot be phased out more quickly, specifying what steps could be taken and the costs associated with achieving a more rapid reduction in the demand for gas from major industrial consumers, the greenhouse horticultural sector and gas exporters. We do not think this announcement really changes anything as the ruling seems to be mainly just reacting to public concerns by calling for increased transparency. The Dutch government already has a very aggressive plan for reducing Groningen production that will see gas production drop to just 2.0 bcm in the gas year starting October 2022. We expect a decision on the cap for gas year 2019-20 sometime in Q3 19 and think the cap will drop to 15.9 bcm, suggesting a 2.2 bcm y/y reduction.

 Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm
Source: Country SOs, GIE, Energy Aspects

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