Europe has begun August with a steep rally in gas prices, just like July, although this month’s price move should be shorter-lived. The bullish factors—an uptick in European LNG reloads and forecasts for unusually hot Asian weather—are not significant enough to alter bearish fundamentals for the rest of Q3 19. We now expect about 1.75 bcm of incremental LNG into continental Europe this quarter, a small 0.25 bcm downward revision to last month’s forecast of +2 bcm y/y. But with upward revisions to Q3 19 Belgian nuclear capacity, disappointing July German power sector gas burn, and a 12.8 bcm y/y storage overhang, the TTF price outlook remains bearish. We still hold that front-dated TTF contracts extending through the summer will be under pressure to drop to levels that encourage maximum fuel switch and could eventually fall to levels encouraging a downturn in Russian supply, widening the contango in the curve.
Where July’s price hike was spurred by rising coal and carbon prices, TTF prices at the start of August were supported by increased LNG reloads from French and Belgian terminals, helping curtail LNG sendout. But TTF prompt prices have already dropped back to just below the fuel-switch parity level, and we expect that prices will drop even lower as stocks begin to reach capacity around mid-September and prices are forced to seek a supply-side response. July reductions in Russian and Norwegian pipeline supply helped Europe make headway on closing the y/y storage gap for the first time this summer, but much work remains. Continental Northwest European stocks began August 12.8 bcm higher y/y, compared to 15.9 bcm a month earlier. Over 58% of the total European storage overhang is in the Northwest region, with Dutch (excluding Norg) and Belgian storage capacity already full.
We have now increased our forecast for Q3 19 LNG imports into Europe to +8 bcm y/y, up from 7 bcm last month and painting an ever more bearish picture. A more aggressive cargo reloading schedule for Northwest European ports in August has led us to shave 0.25 bcm off our Q3 19 forecast for incremental continental NWE LNG takes to 1.75 bcm, with more LNG supply into the southern markets. Given that NWE still has to clear 5.1 bcm of the storage surplus before the end of summer, a 0.25 bcm easing in incremental supply feels like a drop in the bucket—especially when noting disappointing gas burn in Germany, which needs to see the most coal-to-gas fuel switching this summer for Europe to balance.
We mentioned last month that incremental Q3 19 German power sector gas burn faces headwinds as stronger Nordic hydro generation pushes out German power exports. Germany returned to making net power exports last month, but at a much lower pace y/y, providing a modest boost to domestic generation. While German gas-fired generation rose by 2.1 TWh y/y over July, a week of gas prices above the fuel-switch parity level pushed some coal-fired units back into merit, meaning coal-fired generation rose to 3.2 TWh in July from a record low of 2.6 TWh in June. Had it not been for a 0.5 TWh y/y drop in solar generation, gas burn may have been even weaker. The remaining oversupply will pressure prices to push all available German gas plants into merit through the rest of summer—and possibly into October, if early winter cold does not stimulate enough res-com demand.
French power sector gas demand surprised to the upside in July, rising by 0.14 bcm (51%) y/y. Higher scheduled Q3 19 French nuclear capacity had been expected to limit increases in July gas demand, but nuclear outages were revised higher in the second half of the month. Cooling water issues owing to record-high temperatures forced some plants offline, with outages as much as 7.5 GW higher y/y on some days. Weather has cooled from July’s peak heat, but temperatures remain higher y/y, risking further shutdowns. RTE is still showing August nuclear capacity at 5.2 GW higher y/y, but we expect that to be revised down through the month and have softened our Q3 19 forecast for French power sector gas demand losses.
That revision will be broadly offset by changes to the Belgian nuclear maintenance schedule that will see 0.96 GW more nuclear capacity online in H2 19 than expected last month, leading us to slightly revise down our forecast for Belgian power sector gas demand. The Tihange 1N and Tihange 1S units (0.48 GW each) were scheduled to be offline from 3 August 2019 to 15 February 2020, but works are now scheduled from 29 December 2019 to 10 July 2020.
|Fig 1: Continental NW Europe stocks, y/y, bcm||Fig 2: EU fuel switching at the prompt, €/MWh|
|Source: GIE, Energy Aspects||Source: Refinitiv, Energy Aspects|