Strong sendout will continue to weigh on near curve contracts at European hubs that possess LNG import infrastructure. But we expect that TTF near curve prices will rise relative to surrounding hubs as falling domestic supply caused by the lower Groningen cap offsets some of the rise in Dutch LNG receipts. In contrast, a lack of available French storage capacity and a very loose Spanish supply–demand balance will weigh on PEG contracts, leading the French hub to sink relative to surrounding hubs.
LNG stocks at most NW European terminals are near capacity, and we expect that the unloading of the few remaining floating cargoes in the Atlantic Basin this month will keep terminal stocks at high levels well into December. High LNG sendout will continue to offset most of the y/y drop in NW European pipeline receipts, keeping the supply–demand balance loose despite colder-than-normal weather. Low prompt prices will continue to discourage storage withdrawals, preserving stocks for later in the winter and weighing on near curve contracts.
However, prices at some hubs will fall more steeply than others. In particular, TTF contracts will find some limited support from tightening domestic production. Aggregate Dutch production fell by 0.47 bcm in October, offsetting a 0.22 bcm rise in LNG sendout. The Netherlands has also ramped up imports of German gas, with its October take of 0.22 bcm its highest since September 2018. With NAM under pressure to reduce Dutch domestic production as much as possible, we expect the TTF to retain some relative tightness to surrounding hubs. The Netherlands is expected to have more nitrogen supply available in Q1 20, which should raise its ability to undertake quality conversion. Groningen production appeared to jump in early November owing to an apparent shortage in available nitrogen injection. As such, if there are delays to the new supply, or if nitrogen ballasting facilities experience outages in Q1 20, Groningen production would need to rise, and the TTF Q1 20 contract would ease somewhat relative to surrounding hubs.
A loose Spanish market will weigh on French prices
In contrast with the TTF, French contracts should continue to drop more steeply as a very loose Spanish market continues to support rare Spanish gas exports into France. Quick Spanish LNG receipts, combined with high LNG and underground stocks and limited scope to further reduce Algerian imports, have driven PVB prompt prices below the PEG. Higher renewable generation will impose headwinds on Spain’s ability to absorb gas this winter. Spain moved to making net gas exports into France on 2 November, the first time net flows have reversed since August 2018.The PEG–PVB M+1 basis reversed on 8 November for the first time since February 2015, with the PVB price moving to a 5 cent/MWh discount to the French hub. The spread then widened to -0.225 €/MWh on 11 November.
The PEG–PVB basis should remain tight and prone to frequent reversal this winter as both Spain and France battle to unload unwanted supply. French gas exports into Italy via Ontingue are already running at maximum capacity, leaving France with limited export options. If the Spanish hub remains at a discount to France—pushing Spanish gas into France—it will further widen the PEG–PSV basis. And although some NWE countries have had the advantage of making small net injections on the most oversupplied days, PEG currently lacks this flexibility. It is the only country in NW Europe where stocks remain above nameplate capacity as of 9 November.
|Fig 1: TTF-PEG December basis, €/MWh||Fig 2: French pipeline exports into Spain, mcm/d|
|Source: Argus Media Group, Energy Aspects||Source: Enegas, Energy Aspects|
NCG benefiting from higher NEL flows
Russian flows through NEL rose by 12 mcm/d, nearly offsetting a 16 mcm/d y/y slump in OPAL flows. The restrictions on OPAL use by Gazprom that came back into effect in September continue to have a lower impact on OPAL flows than we expected. Over the last two months, OPAL flows have only dropped by an average of 16% y/y, presumably due to greater use of unbundled interruptible capacity that can still be used. In addition, although flows through Velke Kapusany were initially responding upward to offset what was not flowing through OPAL, this movement has increasingly been replaced by greater flows through NEL. Although these developments would keep gas largely in Gaspool, gas would also be available to the exit point at Rehden, where gas can flow into either the NCG or the TTF. We have started to see some impact on the NCG–TTF prompt spread, with that trading over October at 0.13 €/MWh, down from 0.2 €/MWh in September.