London — Storage stocks in northwest Europe took a bashing this winter due to several cold snaps occurring in Winter 2017-18, boosting Summer 2018 contracts and leading to concerns over injection profiles during the summer and stock levels ahead of next winter.
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Gas stocks in France, Germany and the Netherlands combined ended March close to the 4.5 Bcm mark -- the lowest combined figure in at least five years -- after having been close to 36 Bcm in late October, data from S&P Global Platts Analytics showed.
TTF price spreads in mid-March showed a delayed injection season with the April contract seen trading above the Q1 19 contract, meaning that capacity holders were set to continue withdrawing during the first summer month as the market caught wind of further cold weather on the horizon for late March/early April.
Norwegian and Russian flows are both set to be at high levels this summer given the backwardation on the curve allied to a relatively weak Norwegian summer maintenance schedule and extra availability from the UK due to the loss of the Rough reservoir's injection demand.
Nonetheless, market participants will be conscious of potentially weaker Dutch production from the giant Groningen field which could boost H-cal to L-cal conversion demand in the country, however, L-cal demand is massively temperature sensitive, and should be low during the summer months, limiting its effect.
The question regarding the injection profile will, of course, be price driven. The TTF April contract has dropped back to a discount to the Winter 18 contract, making injections next month economical, important for the market given the sheer volume of gas needed to be injected this summer.
Injections into Dutch, French and German reservoirs will have to average roughly 147 million cu m/d from early April onwards to be able to reach the same levels as the previous year by the end of October, well within capacity, after an average of 138 million cu m/d of net injections between April 1-October 30, 2017 was seen.
However, April is still looking set for a slow start to the injection season, with the TTF April contract expiring at a 47.5 euro cent premium to May and a 57.5 euro cent premium to Q3 18, meaning that the remaining five summer months are set to come in below where the current front-month contract sits.
But this is nothing new. Net storage injections averaged 206 million cu m/d in July and 212 million cu m/d in August last year, so on a pure physical level, market participants have little to fear even if injections begin at slow rates this summer.
This has been indicated by the fact that French gas storage auctions came out 96% subscribed despite the narrower summer/winter spread on the benchmark TTF hub, and Italy has already begun to place gas back into storage ahead of next winter after record high withdrawals of 10.6 Bcm between November 1, 2017, to March 31, 2018.
EUROPEAN LNG PULL TO FILL STOCKS
Meanwhile Europe's pull on the global LNG market is set to be stronger this summer as it looks to recover storage levels. Cargo diversions into the region "will be used to bulk up LNG stocks and help safeguard against a late winter cold spell," S&P Global Platts Analytics said March 22.
European and Asian LNG prices are close enough to leave cargoes bound within their respective basins, with insufficient spread between Asia-Pacific and the Atlantic to pull cargoes eastwards over the summer.
As such LNG deliveries into Europe are forecast by Platts Analytics to be up 19 million cu m/d year on year this summer at around 190 million cu m/d.
The Yamal LNG project has started production and been delivering cargoes into the Atlantic basin for either regasification or trans-shipment to other markets. With the arbitrage to the Asia-Pacific region closed, more cargoes could end up at European terminals instead of being trans-shipped to other destinations.
The Dominion Cove Point LNG project on the US east coast is also expected to ramp up by summer. Being closer to Europe than other export projects in the Gulf of Mexico, marginal volumes from here will have lower shipping costs to Europe and volumes could find themselves optimized onto the continent rather than seeking value through the Panama Canal.
Should volumes seek value on European hubs, LNG market participants believe Spain is the most likely destination. Spain is more dependent on imported gas than the rest of the continent, while also having a stronger gas price due to summer air conditioning demand.
The Q3 2018 contract on the Spanish PVB hub was assessed at Eur19.75/MWh ($7.120/MMBtu) Wednesday compared to the TTF and NBP equivalents at $6.507/MMBtu and $6.379/MMBtu.
COAL IN THE DRIVING SEAT FOR SUMMER
Late winter blasts of cold weather have also focused power market attention on the summer ahead, with higher gas prices opening the way for increased coal-fired generation, this despite a strong hike in carbon prices.
The gap between forward gas prices and the coal switching channel indicates that, if and when needed, thermal generation is going to be predominantly coal-fired this summer.
With TTF gas prices almost Eur6/MWh above the benchmark CSP of the coal switching channel, price-responsive gas running in northwest continental Europe will be confined to peak periods.
Even in the UK, where Carbon Price Support invariably promotes gas ahead of coal in the merit order, Platts Analytics view of the Summer 18 coal to gas switching channel has gone from fully utilized to 66% utilized, this as a direct result of cold snaps in March.
The UK remains structurally reliant on gas-fired generation and the markets reflect this, with front quarter gas and power prices rising by 7% and 9% respectively in the month to March 28.
Italy also relies on significant gas-fired generation, with front quarter gas and power prices rising 6% and 9% respectively in the month to March 28.
In Germany and France, gas is not a significant factor in summer power price formation, although CCGT economics can come in to play in France if the export pull to Spain is strong.
Generally, however, Q2 power prices in France, Germany and Spain indicate that these markets are relatively relaxed heading into summer.
Coal prices have been falling and hydro potential is seen as high after record snowfall in the Alps and elsewhere.
As of March 26, future contracts for coal into Europe were posting multi- month lows as illiquidity and weak fundamentals weighed on sentiment.
At $78/mt, the Q2-18 CIF ARA contract was the lowest for a prompt-quarter contract since early July 2017. Newcastle coal futures told a similar story, at $89.80/mt the lowest front-quarter price since late November.
The hydro picture can be summarized as positive going into summer, with resource across France, Germany, Italy and Spain up 3.5 GW to 4 GW year on year going into Q2.
Spanish reservoir stocks are recovering strongly from record lows due to heavy precipitation in March, and despite high dispatch.
France has been running its reservoir stocks hard through the late cold snaps, maximizing market opportunities ahead of rebuilding stocks from the summer snowmelt.
French and Swiss hydro reserves are at low levels going into Q2, but with every prospect of a decent snowmelt season based on reports of large snowpack at higher Alpine altitudes, close to record snowfalls in the Jura and Vosges ranges, while snow in the Pyrenees peaked February 20 and is now melting.