Bearish Q2 signals hold sway for European gas, power markets

Europe is entering its "gas summer" with prices back at what could be considered normal levels and with gas storage stocks in robust health.

Another mild winter and weak demand have left the EU's gas storage sites filled to 59% of capacity and prices trading below Eur30/MWh ($32.37/MWh).

Demand in the EU and UK is set for a 3.7% year-on-year decline in Q2, according to forecasts from S&P Global Commodity Insights, on the back of structurally weak demand in residential and commercial sectors, limited industrial demand recovery and lower gas-for-power burn.

"Prices through Q1 have fallen as comfortable storage met the highest demand period of January, followed by an exceptionally warm February and March period during which demand has generally weakened more than supply," said Alun Davies, research and analysis director at S&P Global Commodity Insights.

"Volatility in gas demand will no doubt come from price-insensitive variable renewable power generation, but in early summer, the system can balance effectively by modulating gas storage flows, limiting price risk," Davies said.

Traders are also being more cautious in terms of European gas demand recovery. "We had expected a tick up in demand but it just hasn't been there," a Switzerland-based trader said. "We are being more conservative for Q2 as to how much demand we expect to come back."

Given the high level of storage as Europe exits winter, the rate of injection into storage in Q2 will leave its mark on the market moving into Q3.

EU storage levels are expected to reach 71% of capacity by the end of June, tracking close to the top of the five-year historical fill range, according to S&P Global forecasts.

Ukraine's role as an "overflow" for European gas stocks could also come into play once again this summer, with Kyiv hoping foreign traders will store at least 4 Bcm of gas in Ukraine in 2024 as EU sites fill.

However, a Russian attack on March 24 caused damage to an unspecified Ukrainian storage site, which could dampen European appetite to store gas there despite Ukrainian assurances that storage operations are unaffected.

Meanwhile, gas deliveries to Europe -- including Russian flows via Ukraine -- have been relatively stable so far in 2024, helping to keep the market in balance, with very few unplanned outages in Norway.

LNG imports -- and US LNG in particular -- also remain key to supply into Europe, with European prices having fluctuated in recent months on news of issues with US LNG supply.

Europe may also continue to compete with Asia for cargoes, with the JKM spot LNG price at a steady premium to European delivered LNG prices.

"We will monitor any lower output at US LNG facilities as the US represents the largest share of LNG import into Europe and this would be a direct hit to our supply/demand balance," the Switzerland-based trader said.

With strong stores and a mild April ahead, however, "do we even need that much LNG over the summer?" the trader asked.

LNG sendout into Europe is set to stay high in Q2 by historical standards at 363 million cu m/d, though down around 17% compared with Q2 2023, according to S&P Global forecasts.

Sendout was already down in March as LNG liquefaction outages dropped utilization from around 80% at the start of the year toward 75%.

Russian LNG deliveries into Europe have been stable year on year in 2024, with a total of 4.9 million mt supplied year to date versus 4.6 million mt in the same period of 2023, S&P Global data showed.

The European Parliament is set to vote in early April on the EU's new gas decarbonization package, which includes a provision to allow member states to restrict Russian gas and LNG imports at the national level.

Solar-driven deflation

Europe's power markets enter Q2 2024 better supplied than at any time since 2020. Solar output is forecast to exceed gas-fired power generation for the first time while any demand recovery is seen as modest.

"The outlook for European power markets remains bearish. We see the pace of renewable growth significantly outstripping the pace of demand recovery with solar output gains alone outweighing the anticipated demand lift," said Glenn Rickson, head of European power short-term analytics at S&P Global.

Demand across the ten market is forecast to lift by 1.7% or around 4 GW year on year. Combined gains for wind, solar, hydro and nuclear, meanwhile, amount to 17 GW year on year.

This is forecast to drive gas-fired generation down 30% or around 12 GW year on year.

Iberia, France and the Nordics are all expected to be at a discount amid strong supply from hydro, a key swing factor during the snow melt season.

While Norwegian reservoir levels are below the 10-year average, Iberian reservoirs are well above, adding to oversupply from wind and solar.

French nuclear has recovered and is forecast to rise above the five-year average to 35.5 GW for the period.

"France is back to being an export engine, with flows to neighboring markets at a record high for the time of year," Rickson said.

French quarter-ahead baseload fell March 26 to its lowest level in over three years, settling at Eur37.17/MWh, EEX data showed. That compared to a five-year average of Eur180/MWh.

Gas and hard coal-fired generation is forecast to cover only 14% of power demand in the EU10 in Q2, down by five percentage points from Q2 2023.

Meanwhile, rising solar capacity could see a further explosion in negative or low-priced hours for the quarter, which features a number of holidays.

The Dutch market could be especially affected, with the country registering the most negative hourly prices in 2023, while the Dutch Q2 peakload contract is trading some 10% below baseload.

Finally Germany, which shut its last three nuclear reactors last April, will now proceed with the closure of 10 GW of coal and lignite capacity.

Carbon investment story

Carbon prices in Europe are expected to show more resilience in Q2 after EU Allowances fell close to three-year lows of Eur52.36/mtCO2e on Feb. 24. Prices have since recovered, finding stability just above Eur60/mtCO2e.

Traders and analysts said there were signs compliance entities had taken advantage of the lower prices. "[There is] a notion that EUAs are becoming one of the best investment stories of 2024 when it comes to returns prompting investment funds to hold some long positions eventually," S&P Global analysts said in a recent note.

The analysts expect EUAs to average Eur54.50/mtCO2e this year versus Eur85.30/mtCO2e in 2023 and Eur81.50/mtCO2e in 2022.

Fundamentals rather than policy have been driving the market in recent months but with European Parliamentary elections scheduled for June 6-9, policy and politics could again become a factor with climate costs in the spotlight.

The European Commission is expected to release 2023 EU ETS verified emissions data on April 3, meanwhile, with analysts expecting emissions to have fallen again last year after 2022's small uptick.

Regulated CO2 emissions from power plants and factories under the EU ETS totaled 1.123 billion mtCO2e last year, down 11% from 1.267 billion mtCO2e in 2022, and 17% lower than in 2020 during the coronavirus pandemic, according to estimates by analysts at S&P Global.

UK carbon prices have been in a downward spiral due to weak manufacturing numbers, along with doubts over the government's climate commitments, but UKAs are seen likely to rise above GBP40/mt on improved demand in spring and early summer.