The EU gas market looked like it had been heading into the winter gas season with balances weak and TTF day-ahead gas prices trading way down below 8.0 €/MWh. The overarching bearishness for the coming winter contracts did reverse on the spate of news on OPAL, Groningen and potential EDF nuclear reactors.
These news items all presented upside risk and mean that the market is facing the potential of end-March 2020 storage inventories with somewhere between 4 bcm more gas in storage y/y if key risks do not materialise, or 30 bcm less gas in storage y/y if three core risks materialise—colder-than-normal weather in line with a 2017 Beast from the East event, a full Q1 20 disruption of Russian gas flows through Ukraine, and increased outages at French nuclear plants in line with 2016 outages.
In terms of those risks, an increase in French nuclear outages seems more likely to us than a Q1 20 disruption to flows through Ukraine. However, if only the EDF risks materialise, then the EU market would likely exit winter with largely the same level of gas in storage y/y.
Outside of the risks, October seems to still have a very challenging set of balances with storage injections going to have to drop by around 4.6 bcm y/y. With still some 2.5 bcm y/y of additional LNG sendout on the cards, expected higher demand of 2.2 bcm will still leave European piped gas facing a need to shed around 5 bcm over the month. Given there is a high degree of hard-to-currently-quantify risk around, driving high risk premiums in prices, we do think the October prompt is going to be closer to 12 €/MWh than the 14 €/MWh level now priced on the forwards.
For the rest of winter, it is now all about how higher supply gets balanced and what role the prevailing risks will play. The EU gas market is set to start the winter with 15 bcm of more gas in storage and around 12 bcm of added LNG supply. That 27 bcm of added supply y/y will be partially offset by demand likely being up by 13.5 bcm y/y due to a mixture of the impacts of a reversion of temperatures back to normal and higher demand from the power sector due to the coal-to-gas switch. As we already have a good 10 bcm more gas demand y/y from the power sector, the actual impact of a high volume of EDF outages would deliver some of the additional demand on its own, with the main difference being the price at which added power sector demand occurs.
Market balance this winter could also come from a drop in pipeline supply or a fall in storage withdrawals. Production from the Netherlands is likely to drop hard, by close to 5 bcm y/y, given the latest pronouncements from the Dutch government about its desire to close the Groningen field as soon as possible. There will be pressure on both Russian and Algerian supply to decline as well, although the economic incentive will be greater for turning down Algerian gas than Russian gas. Still, to limit y/y reductions, Gazprom will have to manage the loss of 50% of OPAL pipeline capacity due to a court ruling. While Gazprom will have a number of ways of mitigating much of that lost capacity, we still see some modest import losses y/y. We do not factor in a Q1 20 loss of Russian gas transit through Ukraine, which, if it did occur, would significantly tighten balances.
The prevailing forward curve is just reflecting a current period of heightened risk, with almost all of those risks being bullish for prices. Without those risks, European balances still seem loose and prices will adjust downwards unless those risks materialise.