As Europe enters the fourth quarter of 2023, and the official start of the gas winter, markets remain on edge with repeated calls for consumers to continue to exercise responsible gas use despite robust storage levels.
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Gas demand is still well down on pre-crisis levels but any new supply disruption or a very cold winter could still trigger the threat of gas shortages.
Market reaction this summer to the threat of strike action in the Australian LNG sector and extended maintenance on Norwegian assets was a signal of continued supply concerns.
The risk premium was especially visible in price spreads over the summer, with the Winter 23 contract having traded at a significant premium to the prompt.
The premium has narrowed recently, with Platts, part of S&P Global Commodity Insights, assessing the Dutch TTF Winter 23 contract on Sept. 27 at Eur46.38/MWh compared with a TTF day-ahead price of Eur40.17/MWh.
A heavy late-summer maintenance schedule at producing Norwegian gas fields kept prompt prices relatively high.
S&P Global senior gas analyst Tom Purdie said the return of production capacity heading into October was expected to add downside price pressure in a month where storage will be at a recent all-time high.
But, he said: "Gas prices must stay high enough through winter to sustain LNG deliveries and constrain European demand sufficiently to allow minimal pull on storage."
As always, a lot depends on the weather, with a cold winter potentially leading to additional demand in the European residential and commercial sectors of as much as 30 Bcm, according to estimates from the International Energy Agency.
Weather aside, Europe will still need LNG to continue to arrive to offset lost Russian gas flows, though imports are likely to be lower than the same period last year.
S&P Global forecasts LNG imports to the EU and UK in the fourth quarter at a total of 36.6 Bcm, down 8.9% year on year. Competition for cargoes with Asia could also intensify, with spot LNG prices for Asia delivery currently at a premium to the TTF.
Europe has deployed new floating LNG import infrastructure since the Russian invasion of Ukraine and more FSRUs are set to be ready for operations by end-2023, including three more in Germany and terminals in France and Greece.
But overall demand levels will be key in the fourth quarter. S&P Global forecasts EU27+UK demand at some 118.3 Bcm in the quarter, which would be a 5.9% increase year on year, albeit from 2022's very low base.
Ultimately the European gas crisis was triggered by Russia and its move to slash exports -- and there is still room for deliveries to fall further.
Some 42 million cu m/d of Russian gas is still supplied to Europe via one entry point on the border with Ukraine at Sudzha and any escalation in the war could still see those exports disrupted.
The remaining flows via TurkStream into Southern Europe -- which hit a record high in August -- are, however, likely to continue through the fourth quarter, not least because those volumes are mostly consumed in Hungary and Serbia, which both retain relatively close ties with Moscow.
The head of the German energy regulator, Klaus Muller, said Sept. 21 that Germany was "much better prepared" for this winter than it was last year, but warned against complacency.
"We can certainly be optimistic, but it is still too early to give the all-clear," Muller said.
Nuclear gains cushion gas risks
Europe's power markets enter winter this year in much better shape than last year, albeit with residual concern in the event of a prolonged period of cold, still weather.
Rising seasonal demand is expected to be offset by improved French nuclear and European wind generation, adding a combined 14 GW to supply year on year, according to S&P Global analysts.
"The risks to both are clear. Historic performance suggests that relying on French nuclear can be problematic, but we forecast Q4 2023 output some 12 GW higher year on year after reactors successfully completed maintenance, including those undergoing corrosion repair," S&P Global European power lead analyst Kerry Thacker-Smith said.
France is set to swing from a discount market in October to a premium market in December, with the ramp-up in French heating demand a key driver.
French Q4 power went into delivery Sept. 27 at Eur112.03/MWh, EEX data showed, with implications for border flows.
With inter-market spreads narrow, S&P Global analysts forecast France will hold a neutral border position through the fourth quarter with Germany/Belgium and Great Britain, and a slim export position to Spain. Exports to Italy are set to rise due to the new Savoy-Piemonte link.
With wind capacity up 15 GW year on year, meanwhile, price volatility will again feature heavily in the fourth quarter following record levels of negative hourly prices in the third quarter, notably in Dutch and German markets.
Hydro levels, another key risk in 2022, have also improved significantly, with Nordic reservoirs at 78% fullness and the region's Q4 contracts near record lows.
Elsewhere, Iberia and Italy have seen minor improvements year on year, but hydro and solar are still positioned to prompt coal ramp-downs.
Within a shrinking thermal gap, where gas and coal compete on price, the fourth quarter could see dynamic fuel switching amid small margins and relatively volatile gas prices.
Higher gas prices of around Eur50/MWh and EU carbon around Eur80/mt could pull lignite into merit orders, especially in Germany, but overall annual volumes are set to fall.
Finally, power demand in October could see the first significant year-on-year gains with average Q4 demand forecast 2% higher year on year.
Carbon under pressure
Carbon prices in Europe face bearish headwinds going into the fourth quarter, with higher auction supplies weighing on the market.
Auction volumes are likely to reach their highest levels of the year in October, followed by hefty volumes in November as a result of the REPowerEU deal.
EU allowances traded between Eur82-Eur92/mtCO2 in the third quarter, with prices falling sharply mid-September as demand faltered.
Analysts at S&P Global expect EUAs to stay on a bearish trajectory, with prices averaging Eur81.23/mtCO2e in the fourth quarter, dipping to a 2023 low of Eur75/mtCO2e in October.
Prices could rebound in December on seasonal demand and lower auction liquidity.
UK carbon prices have continued to languish near record lows after Prime Minister Rishi Sunak in late September rowed back on climate commitments.
This created an even wider disconnect between UK and EU carbon prices, UKAs trading at a premium of almost $50/mtCO2e premium.
Meanwhile, the EU's Carbon Border Adjustment Mechanism enters its transitional phase Oct. 1, with the first reporting obligations covering Q4 2023 to be submitted by Jan. 31, 2024.
The mechanism levies a carbon tax on imports of selected energy-intensive materials and products into the EU, removing the gap between the carbon price under the EU ETS and the export country of origin's carbon price.