After a turbulent September, TTF near-curve contracts are steadily falling as the supply-demand balance loosens. Northwest European stocks will reach nameplate capacity before the end of October, forcing the market to turn down supply in order to balance. Aside from the lingering but slim possibility of no Russian gas transit across Ukraine next year, there are few upside risks for prices through the rest of winter.
Fundamentals indicate that Europe will enter November with an exceptionally loose supply-demand balance, which should weigh on gas contracts for the rest of winter. The TTF D+1 contract is now consistently closing below the fuel-switch parity level—at which all gas-fired units are in merit over coal-fired plants—as Northwest Europe’s available injection capacity shrinks. Storage levels in the region passed the 45.2 bcm mark at which 2018 stocks peaked back in mid-August and are on track to reach nameplate capacity (around 49.9 bcm including Norg) in the next 10 days. Just 0.5 bcm of available capacity (excluding Norg) now remains in Northwest Europe.
Once the demand-side flexibility of injection capacity disappears completely, the market will rely even more heavily on supply-side responses to balance, particularly in the absence of increased heating consumption. Forecasts indicate that weather through the rest of October will be milder than the historical norm, though slightly colder than October 2018, providing only a slight y/y boost to LDZ demand. Strong global LNG supply and weak demand in Northeast Asia point to deliveries into Europe remaining strong this winter. This means reduced pipeline flows will be required to avoid very high storage stocks by the end of March. Our balances indicate that Europe will receive 7 bcm of incremental LNG in Q4 19 and Northwest European terminals have ample spare capacity relative to Q4 18 imports of 4.6 bcm. Combined regasification capacity across Belgium, France and the Netherlands is 4.9 bcm/m, and monthly Q4 18 port receipts in the region peaked at 1.8 bcm in November 2018.
Most of the downturn in pipeline supply so far this month has come from Norway. Norwegian deliveries could continue to post y/y losses into November if the prompt contango to the forward curve remains wide. A yawning 8.70 €/MWh D+1 discount to the Sum-20 contract has encouraged Equinor to defer October Troll volumes. Production from the field will ramp up when that contango narrows (or turns to backwardation) later in the quarter.
However, a narrowing of that spread may not occur until heating demand tightens the market, or until Russian volumes drop off more sharply, which we expect will occur as stocks reach nameplate capacity. The sharp drop in TTF D+1 prices this month so far—with next-day gas changing hands below 9 €/MWh—is partly because the October y/y drop in Russian flows may be less than the market previously expected. Gazprom appears to be making use of interruptible capacity on OPAL to keep up Nord Stream flows (see Monthly: EU Imports, 3 October).
A sharp drop in November Dutch production could provide some minor support for prompt prices next month. Reductions in Dutch supply y/y have been less pronounced than expected this month, but that is because robust Groningen output is being used to fill the Norg storage site. Operator NAM has previously been banned from injecting past September. The market should receive clarity about how much Dutch output might shrink across the rest of the winter in November, once gas is produced solely to meet end-user consumption and export obligations.
|Fig 1: NW Europe LNG port receipts, bcm||Fig 2: Unavailable nuclear capacity, y/y, GW|
|Source: Kpler, Energy Aspects||Source: RTE, Energy Aspects|
French nuclear outages: small late winter bulls at best
The market is still waiting for confirmation from the French regulator ASN that EDF will be allowed to operate the 5.8 GW of nuclear capacity that was shown to have issues last month. The outages currently scheduled at the affected units will boost winter gas demand by just 0.78 bcm. However, even if ASN orders all off the plants offline for the whole season, available French nuclear capacity would still be higher y/y in every month except October, February and March. This indicates y/y losses in required French thermal generation for most of the season. As such, the TTF will still have to be priced to get more gas into power, which will be particularly important if demand is not boosted by weather.