European gas, power markets braced for difficult Q2

London — The European gas and power markets are set for an unprecedented period of bearishness in the second quarter, with prices already at all-time lows, storage stocks and supplies at record highs and demand under pressure from the impact of the coronavirus.

In the gas market, the supply glut is set to be exacerbated by an influx of LNG due to an already oversupplied global LNG market and force majeure declarations by Indian LNG importers, with market participants left wondering just how low prices will fall.

At the end of Q1, the front-month TTF price traded below Eur7/MWh for the first time since S&P Global Platts began assessing the benchmark Dutch gas contract in 2004, with the price dropping more sharply than expected.

"Although we had long been forecasting prices trending down to record low levels in summer 2020, the coronavirus impact on global gas demand, along with its broader macro implications, has seen prices fall far more quickly than we were anticipating," Platts Analytics' James Huckstepp said.

"Assumed price floors set by supply short-run costs have also been revised lower with the weakening of the global commodity complex," Huckstepp said.

Storage stocks in the EU are set to end the withdrawal season at around 55% fullness -- compared with 40% fullness at the same time in 2019 and just 18% in 2018, according to data from Gas Infrastructure Europe.

In absolute terms, EU gas stocks are currently some 57 Bcm compared with 42 Bcm at the same time last year and just 18 Bcm at the end of the withdrawal season in 2018 following the Beast from the East cold spell.

Storage will offer some demand for European gas supplies in Q2 as sites fill again, withl Platts Analytics expecting storage facilities to reach capacity by the end of the injection season.

But elsewhere demand is hard to come by. Coal-to-gas switching in the power sector is largely maxed out, and barring a rapid resolution to the coronavirus crisis in Europe, industrial demand will also remain under pressure.

While difficult to separate the causes of falling European gas demand between mild weather conditions for most of the final winter months and the coronavirus, demand has been hit.

The impact of the virus will likely become clearer through Q2 when heating demand drops away.

Given all the bearish indicators for Q2, the key factor to watch for will be on the supply side and whether Europe's key gas suppliers see production curtailments as favorable to exporting gas at close to short-run marginal cost levels.

Russia -- which over the past few years has been topping up its gas exports to Europe under Gazprom's long-term contract model with sales on its Electronic Sales Platform -- has shown no signs of holding back production.

Similarly Norwegian producers have been supplying gas to Europe at close to capacity in March and a significant chunk of maintenance planned for Q2 has been deferred or cancelled altogether, meaning more Norwegian gas will come to market in the coming months than anticipated before the price falls.

Last summer, state-controlled Equinor deliberately held back production in the hope of achieving higher prices later, but the company has hinted it will not follow that strategy again this year, saying it can get gas to market for less than $2/MMBtu.

Power: gas dispatch exposed

European power demand is expected to fall by at least 10% on the year in Q2 due to coronavirus restrictions, with Italy and Spain the worst hit by extended lockdowns to non-essential activities until at least Easter.

Supply from thermal generation will bear the brunt of demand losses, boosting renewables' share in diminished markets.

"Adjusting our demand assumptions primarily lowers our view on gas dispatch, with mainland European [gas dispatch] markets down 12 GW versus our Base Case for Q2 2020, while coal dispatch falls by just 2.4 GW," Platts Analytics' Sabrina Kernbichler said.

This represented a 40% gas and 19% coal decline versus pre-coronavirus demand adjustment levels.

For Q3 2020 the declines reduce, with no demand changes beyond Q3 foreseen as yet.

"The situation is still evolving but we have provisionally reduced the aggregated demand across EU4 by about 16 GW in Q2 (down 11% on the year) and half as much in Q3, leaving Q4 unchanged at this point," Platts Analytics' Giuliano Bordignon said.

With current demand destruction front loaded through the morning peak, solar is set to squeeze thermal plant run times, pushing gas and coal to the shoulder peaks (early morning/late evening).

Solar output generates 75% of its annual output in the summer with midday generation across Europe set to reach 80 GW, having already touched 60 GW in late March.

And while wind output backs off over the summer, generation here averaged 34 GW last summer.

Q2 meanwhile marks the height of the hydro season with most reservoir stocks above last year's levels, notably in the Nordics, where prices have hit rock-bottom – not least because of estimated Norwegian snowpack equivalent to 78 TWh around hydro reservoirs.

Given these supply surpluses, the closure of France's oldest reactor at Fessenheim, delayed French reactor maintenance and the opening of the Datteln 4 coal plant in Germany are set to have minimal market impact, at least in the quarter under review.

Carbon: April compliance

For carbon prices in the EU Emissions Trading System, the coronavirus continues to dominate other factors in the short term, being a major wildcard factor in the second quarter of 2020.

The severity of the government response to the virus has trumped other supply and demand factors so far this year, sending carbon prices down to a two-year low and confounding analysts' earlier bullish price estimates for 2020.

EU Allowance futures contracts for December 2020 delivery collapsed to as low as Eur14.34/mt ($15.48/mt) in March, down 45% from a February high of Eur25.86/mt, as European governments imposed lockdowns which brought travel and industrial activity to a near standstill, severely reducing demand for allowances.

"The coronavirus outbreak's impact on EU ETS demand from both the power and industrial sectors this year notwithstanding, EUA prices tend to find support during the April compliance period for the previous year's emissions," said Jeff Berman, director of emissions and clean energy at Platts Analytics.

"Even though 2019 saw substantial declines in covered emissions, there will inevitably be last-minute compliance buying this month that will help limit downward price pressure," he said.

As of March 31, Platts Analytics sees EUA prices at Eur18.00/mt on average in April, and easing to Eur17.00/mt in May through June, although further price swings are possible, Berman said.

December 2020 EUA prices closed at Eur17.68/mt March 31, up off the lows seen earlier in the month.

Some analysts estimate the virus impact could see CO2 emissions from stationary installations fall by as much as 8% (130 million mt) in 2020, in the wake of a similar-sized fall in 2019 – expected to be the largest drop in emissions since the 2008 global financial crisis.

Analyst Espen Andreassen at energy consulting group Wattsight expects EUA prices to trade at around Eur16.00/mt in April, but rise to Eur19.00/mt by the end of 2020.

"The major reason for this moderate increase, relative to recent market prices, is that we expect prices by December to reflect more supply-tightening policy developments," Andreassen said.

"Still, given the [coronavirus] crisis, we acknowledge that lawmaking processes of going for a more ambitious 2030 climate target could take more time than previously assumed, hence serving as a less bullish medium-term price signal than assumed earlier," he said.

The European Commission is aiming to propose a deeper EU 2030 emissions target over the summer of 2020, which is likely to mean tighter annual CO2 caps under the EU ETS over the next decade.