Unbalanced bull

Published at 15:53 15 Jul 2019 by . Last edited 11:18 22 Aug 2019.

Some supportive short-term supply fundamentals coalesced on Monday morning to help last week’s bull run in the European gas markets maintain momentum, but Europe’s 23.4 bcm y/y storage surplus is the elephant in the room. Our forecast indicates that Europe will head into the last weekend of July with a 21.8 bcm y/y storage surplus, leaving August and September with an enormous balancing task. July has seen the return of LNG reloads from Europe as market participants take advantage of cross-basin seasonal spreads, but European LNG stocks are still high enough that incremental LNG sendout is required to clear space for incoming cargoes. With storage still expected to fill by early September, even with higher gas demand, the current price moves up do not look sustainable and we expect to see another pricing downwards at the TTF in the coming weeks, with the parity fuel switch trigger way down at 11.5 €/MWh.      

Surprise bull run

While the move up in gas prices in the week ending 5 July was largely driven by a short-squeeze in the coal market, the strength at the tail end of the week ending 12 July pointed to a similar squeeze in the gas market as short-covering pushed buying up across the TTF curve. To be fair, the strength at the TTF prompt is harder to put down to market positioning and does at least hint at some tighter fundamentals on a w/w basis. The EU gas markets in general looked tighter as the UK system appeared to start Monday (15 July) undersupplied, there is a short-term outage at Aasta Hansteen, imminent maintenance (starting tomorrow) on Nord Stream and its downstream pipelines OPAL and NEL, and weather forecasts for the continent pointing to a move back to higher-than-normal temperatures.

While this is tightening up the system on a w/w basis, despite forecasts for strong wind generation, the market is still very loose in y/y terms. Bearish fundamentals continue to loom over the power sector over the next few months, at least in Northwest Europe. French nuclear capacity is scheduled to rise y/y through the rest of the summer and a much higher Nordic hydro balance y/y is supressing aggregate German power generation, leaving less opportunity for stronger gas burn y/y. In fact, as far as demand goes, the only bullish factor in recent news is the forecast for unseasonably hot weather, which could draw down already low Iberian and Italian hydro stocks, providing more support for thermal generation in the southern European markets.

The market has finally made some progress in getting the y/y storage surplus down. The surplus was 23.3 bcm on 13 July, but that is still 11 bcm higher than it will need to be at the end of the injection season for stocks to be at maximum capacity. Looking at it another way, stocks of almost 78 bcm currently are only around 20 bcm short of maximum capacity. Injections in July and August 2018 totalled a combined 24.8 bcm—and that was without incremental LNG supply, Nord Stream maintenance at the same time, and Gazprom not yet selling any gas on its Electronic Sales Platform (ESP). This year, LNG sendout will still be strong, even if easing from the highs of Q2 19, and Gazprom has shown little interest in turning down its ESP sales, with 0.98 bcm already sold for July delivery.

The issue with the latest surge in TTF prices is that it increased the relative price of gas against coal, taking Aug-19 to 13.9 €/MWh in Monday morning trading, which is back above the 5% fuel switch trigger. This is going to make it even harder to get injection rates down, so the rise in gas prices does look to be unsustainable. We still think that the gas market should be pricing forwards contracts far closer to the parity trigger at 11.5 €/MWh. The strength in the TTF has also helped keep the Aug-19–Sep-19 spread around 0.5 €/MWh, which does not seem to be pricing in how low prompt prices might go in September with very little storage injection capacity available and still-rampant supply. Given we do expect the gas market to start to price down again in the coming days, this spread could also begin to narrow. Despite the volatile movements of the past two weeks across the curve, the mid-winter spread (Q4-19–Q1 20) has largely stabilised around 2 $/mmbtu, up from 1.25 €/MWh at the start of May. That wide spread will only start to narrow when there is some clarity that either the Russia-Ukraine transit dispute is resolved or that Nord Stream 2 (NS2) is likely to be online sometime in Q1 20. Neither of these issues are likely to be resolved before September, so that spread is likely to stay as it is, with little pressure to widen unless the odds of having no transit agreement and no NS2 increase further. 

 Fig 1: TTF Aug. 19 – Sep. 19 spread, €/MWh Fig 2: TTF Q4 19 – Q1 20 spread, €/MWh
Source: CME, Energy Aspects Source: CME, Energy Aspects
Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm
Source: Country SOs, GIE, Energy Aspects

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