European Gas Market Outlook

Gas Market Outlook
Editorial
June 20, 2019Joachim Endress

Since October-2018 we have seen a gradual decline of European and Asian gas spot prices, Dutch TTF was eroding to the lowest prices in ten years. Bearish oil prices during last winter and low gas consumption throughout the whole winter season have left European gas storage inventories at exceptional high filling levels at the start of the summer season. Low storage injection demand and a good supply situation so far in Q2-19 have impacted the spot market strongly bearish, while front season contracts have remained almost unaffected and moved sideways.

Demand and supply

Looking at the major suppliers and EU gas demand in 2020, we might see EU gas demand stable at around 400 bcm/year (2018: 401 cbm). Russia (2018: 39%) and Norway (2018: 27%) will remain the leading natural gas suppliers to the European Union, while we will see a further decline in EU gas production due to decreasing UK and NL gas production. Also, we will see a further decrease in Algerian gas exports to Europe due to increasing domestic demand. The European supply gap will be closed by increasing LNG imports and increasing imports from Russia (via Nord Stream 2 and Turk Stream). 

Waiting for the oil price comeback

Since we expect Brent Crude to trade flat in 2020 around 70 USD per barrel, we do not assume any additional bearish or bullish impact for the gas market from the oil market. At the beginning of 2019, we expected that 2020 is going to be the year for the oil bulls. Many market participants forecasted a comeback around 100 USD/bbl, but most recently these hopes were fading against the background of rising shale production, the possibility of deepening trade wars and a slow down of the global economy.

Gas-to-power demand increases

Moreover, the increasing gas-to-power demand for the rest of 2019 and 2020 is going to impact gas spot prices. Recently, global coal prices have fallen due to eroding global demand and bearish Chinese outlooks. If considering gas’ role for Germany’s public power generation for five months of 2019, gas-fired power production doubled its output year-on-year, while hard coal-fired power generation has fallen by 20%, based on preliminary figures. On the back of a bearish coal outlook for 2020 (DES ARA: 63 USD/t) and firm CO2-prices, we expect gas-fired power generation in 2020 further gaining against coal. 

Will Nord Stream 2 be operative, or not?

Whether the pipeline Nord Stream 2 will be operative in time or not, will impact European gas price developments during the next winter. Denmark might veto the initial pipeline route after it passed a law in 2017 that could allow it to ban the pipeline from passing its sea territories. Both parties lately discussed a third route option. Russian supplier Gazprom wants to bring Nord Stream 2 online before transit contract to Europe with Ukraine’s gas company Naftogaz reaches expiry on Dec 31 2019. Together with the new pipeline Turk Stream, Gazprom will deliver 86.5 bcm/year on new routes to Europe, which corresponds to the 2018 transit through Ukraine. A worst-case scenario would see Gazprom decreasing to its minimal contractual volumes down to 20 bcm/year, which could see European gas prices spiking due to the shortfall from storage and likely even more expensive LNG supply. This might be backed by the fact that many of the Gazprom storage facilities in Germany were already filled at 100% in June. However, it seems more likely that Gazprom will fully use the Ukraine transit route until Nord Stream 2 and Turk Stream are online. 

Europe more dependent on LNG

The availability of LNG in the EU might become more important for European gas prices in 2020 as it has become an integral part of the European gas mix during the last two years (2018: 12.4%/ 50 bcm/year). European hubs compete with the Asian gas market (JKM = Japan Korea Marker) to maintain or even to increase this part. European LNG tends to come from Qatar, Russia and Africa. Qatari LNG is limited in terms of long-term availability but available at the lowest cost estimated to 14 €/MWh LRMC (long-run marginal cost including liquefaction). In times of low spreads between UK NBP/NL TTF and Asian JKM all eyes are on shipping cost and its optimization. Lately, we have seen a strong drop in shipping costs in 2019. It needs a premium of 1-2 €/MWh averagely at UK/TTF against JKM to divert Qatari LNG ships to Europe. In 2020 we will see a tighter correlation and mutual dependence of both gas indexes. 

A bullish autumn

The bearish sentiment at the spot market may continue until July/August. We may even see new lows below 10 €/MWh. From mid-August onwards, we expect a gradual recovery due to extensive maintenance works in Norway, and lately in September a strongly bullish spot market, with the TTF Day-Ahead around 18 €/MWh. Spot prices will close the gap to currently traded winter contract prices, while front season contracts will continue performing sideways. Winter contracts and spot prices during winter might be profoundly impacted on the outcome of the Nord Stream 2 issue, LNG availability and temperature-related consumption. We might see spot prices returning to pre-winter level in Q4-19 above 20 €/MWh and in Q1-20 peaking to 26 €/MWh. If winter comes out normal, we might see Day-ahead in Q2/20 around 20 €/MWh or below.

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