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Analysis: Northwest European gas storage overhang pushes out TTF summer-winter spread

Highlights

NW European stocks running 5 Bcm higher than 2018

TTF Winter-Summer 19 spread blows out past Eur3/MWh

Incentive for storage injection, but space limited

London — Continued robust natural gas storage stock levels in Northwest Europe combined with healthy pipeline and LNG supplies are putting serious pressure on the summer 2019 European benchmark gas price, widening the spread to next winter.

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With storage set to remain relatively full at the end of the winter -- unless an unexpected late seasonal cold snap requires significant withdrawals -- demand for injection is likely to be muted this summer.

The Dutch TTF Winter 19-Summer 19 spread has blown out to more than Eur3/MWh compared with just Eur1.65/MWh at the start of January, when significant risk premium was still priced into the winter contract.

Both contracts have slumped in recent weeks, but Summer 19 is falling more quickly.

TTF winter-summer 19 spread blows out past Eur3/MWh

Often the winter-summer spread widens because of concern over the winter outlook and the need to incentivise storage, but now the concern is on the summer contract and where gas demand will come from.

STORAGE INCENTIVE

The summer-winter spread is incentivizing storage injections this summer, but with storage facilities already well stocked, there is limited capacity for new injections despite the price incentive.

Both Norwegian and Russian gas supplies have remained at record highs since the start of the year after a strong 2018, while the sharp pick-up in LNG imports into Europe that started in Q4 shows no sign of letting up.

According to data from S&P Global Platts Analytics, stocks in continental Northwest Europe (Germany, the Netherlands, France, Belgium and Denmark) are currently just under 24 Bcm.

That compares with 19 Bcm at the same time last year -- ahead of the major cold weather system that engulfed the region in late February/early March that saw record storage withdrawals.

NW European storage well up

By contrast, the weather outlook for the remainder of February in Northwest Europe is for temperatures above the seasonal norm, limiting gas demand for heating purposes.

That suggests stocks will end the winter period significantly higher than in 2018.

As at end-March 2018, Northwest European storage stocks totaled just 4.5 Bcm. Assuming lower withdrawals in the coming six weeks, it is likely that European summer gas demand will be significantly lower than in 2018 when summer prices were kept high by injection demand.

One storage facility that could stand to benefit, though, is the 1.3 Bcm capacity Cornegliano site in Italy, which started commercial operations late last year.

Because it is still relatively empty, shippers could look to benefit from the wider seasonal spread to lock in the value of their gas.

The winter-summer spread in the Italian wholesale market, the PSV, widened to Eur2.20/MWh on Friday from Eur0.96/MWh at the start of the year, according to Powernext data.

LNG, COAL SWITCHING

Key to the further development of the summer-winter spread is likely to be how much LNG continues to land on European shores in the coming months and whether gas-fired plant will be able to crowd out a significant amount of coal-fired generation in the summer, so-called coal-to-gas switching.

The global LNG market is set for a boom in new production capacity in 2019, and with Asian demand this winter weak on mild weather, and similarly high stock levels, Europe is expected again to be the "sink" for surplus cargoes.

Industry officials speaking last month at the European Gas Conference in Vienna were in agreement that Europe would likely attract more LNG over the course of 2019 than in previous years.

Two other factors that could affect the balance are a possible turndown of the flexible component of Russian term contracts by European buyers over the summer period and a deferral in dry gas production from Norway given that the Summer 20 and Summer 19 backwardation recently flipped into a Eur0.50/MWh contango, according to Platts assessments.

-- Stuart Elliott, Stuart.Elliott@spglobal.com

-- Fabio Reale, fabio.reale@spglobal.com

-- Edited by Jonathan Loades-Carter, newsdesk@spglobal.com

Supercooled: The evolving LNG fleet driving the global gas boom

The global LNG fleet grew at its fastest rate ever in 2018, with newer and better technologies. But was this enough to absorb the vast amount of new LNG supply coming 2019, mainly from the US, and still keep freight rates at affordable levels?

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