As you were

Published at 14:10 11 Oct 2019 by
  • While the first half of September was characterised by potential risks coming into the winter balances, the last few weeks have seen fears about the potential impact of these risks subside. As a result, the European prompt gas market has been crushed, with early-October TTF day-ahead prices trading consistently below 10.00 €/MWh.
  • This does not mean the risks facing the EU gas market have been resolved. The total capacity of EDF nuclear plants affected by manufacturing irregularities was reported as 5.8 GW, which was much less than expected. While ASN has not yet specified what remedial action EDF will need to take, even if all of this capacity was required to shut immediately, only about 0.8 bcm/m of gas demand would be added. 
  • The reduction of usable OPAL capacity that arose from the ECJ ruling was also less pronounced than expected. We thought this would result in an OPAL flow reduction of 40 mcm/d , but over the first few weeks of the capacity restrictions those reductions have only been around 17 mcm/d. Lost flows have been replaced by offsetting deliveries through Velke Kapusany, with Gazprom avoiding any real reduction in its supply to the market.
  • Finally, since the latest round of Dutch proposals, Groningen production has ramped up, presumably with a view to filling the additional 1 bcf of Norg storage capacity that NAM has been granted. We think this will help meet peak demand, with Groningen set to turn down later in the winter. 
  • Russia remains the big risk in the market and even while the impact of OPAL has been minimal, transit issues remain unresolved. Talks with Ukraine and Russia in September did not last long and seemed to focus on unbundling and new capacity booking systems being pushed through by Naftogaz to comply with EU legislation. While short-term capacity booking could be used to keep gas flowing in Q1 20, relying on this in the long term would primarily suit Gazprom. Ukraine wants significant flows guaranteed and the EU wants Gazprom to commit to at least 40 bcm/y of transit.
  • Without a significant risk of Q1 20 supply disruption, the direction for November prices would be more clearly bearish. The D+1–Nov-19 spread is currently more than 6 €/MWh. This discount suggests that if the weather remains around seasonal norms, the current Nov-19 contract price is currently well above where we would expect November prompt to outturn. However, Nov-19 is at a discount of almost 1 €/MWh to Sum-20. As such, unless already physically hedged at a higher price, there is little incentive for participants to withdraw gas from storage during November. If the Nov-19 price falls further, that contango will only widen. This could point to eye-wateringly high storage stocks heading into December.
  • Assuming normal weather conditions, we think the end-winter storage balance could be 5 bcm higher y/y at 51 bcm. This balance is predicated on achieving high levels of fuel switch in the power mix and therefore low gas prices across the winter. With more LNG expected during summer 2020, 5 bcm less injection capacity points to pricing as much gas-into-power as possible. Even if that happens, we think the market looks oversupplied by 6 bcm. Balance will therefore have to come from pipeline or LNG turndown. Either way, this suggests prompt and curve TTF gas prices as low as 11 €/MWh, or even lower, for most of summer 2020.

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