European gas markets underwent a sharp rally last week—similar to the jump we saw in early July—but the price rise hardly seems justified by current fundamentals. A few bullish factors have appeared, including a slowdown in LNG receipts on more aggressive European reloading into Asia. Still, Europe entered August with a 22.1 bcm storage surplus y/y and we forecast that the surplus will drop to just 20 bcm by 16 August. There will be plenty of surplus to clear in late August and September. We still expect Europe will need to maximise coal-to-gas fuel switching and gas prices will need to fall to a point that incentivises a turndown in Russian supply for the market to balance, even accounting for our forecast 1.1 bcm y/y drop in Norwegian supply in August.
The price rally late last week was inconsistent with ongoing bearish fundamentals. The Sep-19 contract closed at 12.0 €/MWh on Friday (+13% w/w), settling above the fuel switch parity trigger for the first time since 18 July. There was a similar rally at the start of July, with the M+1 contract bid up for most of the first two weeks only to fall sharply over the second half of the month. While that rally occurred during a heatwave, the fundamental market balance then suggested such high prices were far from justified. Last week’s rally has a similar feel.
The few slightly bullish factors—a slowdown in incremental LNG receipts this week into Europe and revised forecasts indicating hotter-than-normal weather in Japan and Korea in August—are unlikely to have a big enough impact to counteract the overarching bearish dynamics for the rest of the European summer. Europe entered August with 83.5 bcm in storage, a 22.1 bcm surplus y/y and only 3 bcm less than 2018’s end-of-injection-season high. There is 15 bcm of spare capacity left in EU storage. A total of 20.6 bcm was injected across August and September 2018. Injections will have to fall by at least 5.4 bcm for the same period in 2019 given the physical constraints on storage. Our forecast shows Europe shedding about 2.1 bcm of the y/y surplus by 16 August, but that will require maximum fuel switching across Europe, even after taking into account forecasts of predominantly warmer-than-normal weather across continental Europe boosting power demand.
It will be hard to reduce injections as the TTF-Henry Hub arb stayed wide enough through late July to ensure that most US LNG cargoes in September will be loaded, meaning LNG supply to Europe in late summer should rise y/y owing to increases in US liquefaction. LNG imports have shown some signs of easing, with port receipts a touch lower y/y last week and set to be flat y/y in the week to 9 August. LNG imports in August could be the lowest for any month so far in 2019. Scheduled receipts for the first half of August so far are only higher by 0.3 bcm y/y, vs the average 2.4 bcm y/y increase in the first half of every month since January 2019.
|Fig 1: TTF D+1-Sep spread, €/MWh||Fig 2: NW European LNG port receipts, bcm, y/y|
|Source: CME, Energy Aspects||Source: Kpler, Energy Aspects|
Pipe supply slowing, but maybe too late
Supply from all major sources to Europe has started to fall y/y, which should help the market balance. Norwegian flows are starting to fall, which we have thought all summer would be the case, as maintenance in Q3 19 will potentially take out almost 4 bcm more gas supply y/y, with August and September scheduled to be the most intense period for outages. With the D+1 and Sep-19-Sum-20 spread still just wider than -5 €/MWh, there is little to encourage flexible production from Troll or Oseberg. Norwegian production fell by 1 bcm y/y in July and we think the drop in August will be at least 1.1 bcm y/y given Gassco’s maintenance schedule. We expect that August UKCS output will be slightly higher (+3 mcm/d) y/y owing to incremental production from the new Culzean field. Last week’s w/w slump in UKCS production (-13 mcm/d) also helped feed last week’s rally, although deliveries into UK terminals were a touch higher y/y. The Forties Pipeline System’s Unity platform shut on 1 August for planned maintenance, with various fields (Greater Britannia and Elgin Franklin) also scheduling maintenance. Perenco’s and Shell’s Bacton terminals also began planned maintenance, on 31 July and 1 August respectively, while an unplanned outage at Culzean also curtailed output from 3 August (see Fig 38 for details). Culzean is expected to return on 6 August.
Another of our long-held views on summer balances is that Russian flows must come off. A drop in total Russian flows to Europe did occur in July, of 0.7 bcm y/y, despite continued aggressive selling on the Electronic Sales Platform (ESP). The overall y/y reduction largely came from a slowdown in deliveries into Slovakia and Romania, so Western European markets were less affected. Sales on the ESP for August (1.3 bcm) have already surpassed those for July (1.2 bcm). While the ESP will offer another 0.2-0.3 bcm of spot supply over August, we still think over the month that Russian flows will need to come off by at least the same amount as in July for the market to balance.
While supply has started to respond to the prevailing low prices by falling, the shrinking amount of available storage capacity will mean balances will be loose in both August and September. With September still running the risk of having a couple of weeks with no meaningful storage space in which to inject, the 1€/MWh premium that Sep-19 holds over the prompt seems high. As with the rally in early July, the rally in early August seems at odds with the wider balances. We expect the current rally to hold for less time than previously, with the market generally more likely to price down.
|Fig 3: Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|