The impact of further pandemic lockdowns is compounding an already bearish outlook
The benchmark Dutch TTF price recovered strongly in the third quarter of 2020 and has largely held onto those gains for now. But analysts warn that Europe could still see another winter of low gas prices, particularly given the risk posed by further lockdowns to tackle new waves of Covid-19 infections ahead of any widespread rollout of vaccination programmes.
Gas demand in Europe recovered in June and through the third quarter, after falling by over 11pc—or 10bn m³—between early March and end of May, mainly due to drops in industrial and power generation requirements, Gergely Molnar, a gas analyst at the IEA, told Petroleum Economist’s LNG-to-Power Emea forum in early November.
Industrial gas demand was down by over 15pc during the tightest lockdowns in France, Italy and Spain. And power sector demand was down by over 12pc, which “clearly weighed” on gas-fired power generation in particular, which was down by 20pc. Overall European gas consumption was down by 6pc year-on-year
But it then rebounded by 3pc year-on-year from June to September, driven almost entirely by the power sector, says Molnar. Northwest Europe’s nuclear plants were a significant factor, with longer maintenance periods due to coronavirus constraints and outages in France and Belgium contributing to a year-on-year contraction in output of almost one-fifth.
“Gas-fired generation captured most of that space,” says Molnar, as gas became increasingly competitive versus coal and even lignite. The depressed gas prices were obviously a factor, but a sharp recovery in carbon prices—from a low of c.€15/t CO2e ($17.9/t CO2e) during lockdown to almost €30/t CO2e in August—also played a role.
And the demand story was almost matched by price trajectory, The TTF front-month price fell from c.€13/MWh at the start of the year, according to data from price reporting agency Argus Media (see Fig.1), to a low of just above €3.50/MWh at the end of May, only to roar back to over €15/MWh by late October. The price has since retracted slightly to around the €14/MWh mark, which is also where the January, February and March winter forward month contracts sit.
Rocky road back
But the key question is whether, with the prospect of ongoing restrictions until mass vaccination, Europe will see a delayed demand recovery from the Covid-related drop or a rapid rebound. “Unfortunately, it is looking increasingly likely that we are entering a delayed recovery scenario,” Molnar suggests.
And his view is shared by Wayne Bryan, director of European gas at data firm Refinitiv. Even before the prospect of further lockdowns, Refinitiv saw this winter being very similar to the last few low gas price winters—particularly given a forecast of mild, wet and windy conditions.
French and Belgian nuclear availability has also now improved, with the former back up to 43GW and forecast to be above the 3-4 year average availability out to the end of the year.
Strong Norwegian and robust Russian supply, and the return of more US LNG into northwest Europe from November, completed Refinitiv’s initial bearish outlook.
“Fast forward 2-3 months to now and there is the potential impact for further downside in demand,” says Bryan, citing German, French and UK lockdowns. And the impending startup of the Trans-Adriatic Pipeline, bringing Central Asian gas into Italy, is another depressive factor, as it “will draw some Italian demand away from northwest Europe”.
European gas storage at “still very ample” levels and increased volumes moved into Ukrainian storage over the summer—incentivised by their customs-free regime which allows gas to be stored there for up to three years—also weigh on the market, says Bryan.
But there remain some variables that could turn the picture on its head. The slight easing of TTF forward prices “might spur a bit of additional gas demand and put some of the more modern coal plants out of the money”, Bryan suggests.
As always, though, weather is the major wildcard, with an added twist this winter. A potential La Nina effect in Asia could translate into some cold spells in Europe. And “if a lot of US cargoes are diverted to Asia due to La Nina, we will see the European markets start to rise”, he predicts.
More interesting could be “if we have a polar vortex episode like we saw a couple of years ago, for two weeks or even up to a month”. “The effect on gas demand would be quite high and prices would really start to react,” says Bryan.
This is based on Refinitiv observations of what happened at the start of October in France, the Netherlands, UK and Italy during a 10-12 day cold snap. “We saw local distribution zone demand rise significantly above the three-year average. Obviously, occupancy rates in domestic residences are up to 60pc higher. On a personal basis, I was home all day and my heating was on, where I would normally be in the office,” says Bryan, predicting the potential for some “record demand numbers” in the domestic sector.
Source: Admin Petroleum