Since April-19 we have seen a volatile sideways movement at the Dutch TTF, with Spot prices moving between 9-13 €/MWh. 9 €/MWh boundary proved to be resistant, due to reduced gas flows in July and August in comparison to last year. Gas Spot prices were mainly driven by the events at the surrounding energy markets, while Spot was impacted most by the events at the emission, power and coal market. We have seen volatile prices at the emission market among 21-29 €/t, which impacted strongly on gas-to-power demand in North-Western-European gas markets. Gas spot prices might be impacted by increasing gas-to-power demand for the rest of 2019 and 2020. Global coal prices have recently fallen due to eroding global demand and bearish Chinese outlooks. On the back of a bearish coal outlook for 2020 (DES ARA: 64 USD/t) and firm CO2-prices, we expect gas-fired power generation in 2020 further gaining against coal.
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), which corresponds to around 4.000 TWh. Russia (2018: 39%) and Norway (2018: 27%) will remain the key 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. 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).
The availability of LNG in the EU might become further important for European gas prices in 2020. LNG became during the last two years an integral part of the European gas mix (2018: 12.4%/ 500 TWh/year). Comparing the period Jan-Jul 19 with the previous years (Chart 2) we see a strong increase of LNG supply in all major European countries towards the corresponding periods in 2017 and 2018. Total LNG supply has more than doubled between Jan-Jul 19 towards corresponding period in 2018, with Spain and France being the major markets. We have seen the highest demand growths in the Netherlands, Belgium and the United Kingdom. Due to the shortage of storage facilities in the United Kingdom, we see the UK market increasingly dependant on LNG imports. The global economic tensed situation and erratic action patterns of the US government may impact on LNG prices in Asia (JKM). Therefore we see a growing correlation between European and Asian gas prices.
The interesting question remains if Spot prices will recover within the next months from their recent summer low. Besides the LNG supply situation, we have to look at the future development at the Nord Stream 2 pipeline, the Dutch gas production in Groningen and the macro-economic situation majorly impacted by the conflicts in the Middle-East and the U.S. - Chinese trade war. Regarding Nord Stream 2, only 75% of the total length was lately completed. The last 25% need to be finished until the end of 2019, crossing territorial waters of Denmark, which remains the only country that has so far not agreed to the project. Regarding Dutch production, it seems likely that the Dutch government will cut gas production from October 2019 onwards by more than 20% as previously announced. To limit the seismic risks in the region, this would mean that yearly production would drop from 15.9 billion cubic metres to 12.8 billion cubic metres.
With regard to past years with comparable framework conditions (full storage facilities, low demand, high spreads to winter forward contracts, etc.), spot prices usually showed a strong approximation to the forward contracts. This would mean that TTF spot (Chart 1) could average in Q4-19 above 16 €/MWh and in Q1-20 we might see an average price level of 19 €/MWh or above. Nevertheless, everything depends on the weather situation during next winter, the first mid-term weather forecast in October might play a decisive role.
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