Robust supply, mild weather, recession drag power prices down to pre-invasion levels

European power prices have fallen to pre-Ukraine invasion levels for winter contracts, as a combination of ample LNG supply, mild weather and a weak economy weighed on the market, while prices further out were firmly higher on the year, analysis by S&P Global Commodity Insights showed Jan. 5.

In Germany -- the benchmark European power market -- the front-month price averaged below Eur180/MWh ($190/MWh) this year so far. This was 16% below the whole of January 2022 for the corresponding contract, before Russia's military invasion of Ukraine Feb. 24 that exacerbated already tight natural gas and power supply across Europe.

Moreover, values at the front of the pricing curve have been consistently dropping in recent days across leading power markets, with the German front month trading at just Eur166/MWh Jan. 5.

In contrast, far-end prices were firm and held above levels seen registered a year earlier. For instance, the German front-year contract averaged about Eur206/MWh this month so far, some 63% above January 2022.

A similar pattern was observed at the European-benchmark-setting Dutch TTF natural gas hub and across other key European power markets.

LNG, natgas price dynamics

"The contango...is definitely driven by the weather and the availability of LNG with tanks [is] still very full. And [there's] a bit of demand destruction due to weak macro/recession," a NWE-based gas trader said.

Indeed, Atlantic LNG prices have fallen as supplies of home heating and power plant fuel outpaced demand in recent weeks, amid warmer-than-expected winter temperatures in Europe. The delivered price of LNG into Northwest Europe fell Jan. 4 below $20/MMBtu to an eight-month low.

That was a sharp turnabout from just months earlier, on Aug. 26, when DES Northwest Europe was assessed at a record high of $74.486/MMBtu. Against that backdrop, Northwest Europe delivered LNG derivatives for the prompt months have flipped to a discount to JKM derivatives for the same period, while the summer 2023 portion of the forward curve holds at a premium. Platts JKM is the benchmark price for spot delivered LNG into Northeast Asia.

Market sources said that amid further weakening in the inland Dutch TTF gas hub price, differentials between European LNG and natural gas were narrowing to near parity as 2023 began.

'99 problems'

Nothing prevented gas prices -- and hence power -- from losing more value in coming weeks, provided storages remain full and demand low, market sources said. Yet far-curve prices could continue to retain their risk premium.

The bottom of the range for the TTF front-month price is Eur52.34/MWh, while Eur50/MWh could be a psychological support level, according to the gas trader.

The contract was seen trading at around Eur66/MWh Jan. 5 on ICE Webex.

"[In] the long term it is the story of 'we have 99 problems, but we take them one at a time'...The problem...is next winter/refilling for next winter. That is yet to be sorted and highly dependent on how this winter is going to end up [storage] fullness-wise," the trader said, adding that the key drivers would be the weather and the economy, including the re-opening of China.

Aggregate EU gas storage was more than 83% full Jan. 3, the most recent data from transparency platform AGSI showed. This was well up from less than 53% a year earlier. If net withdrawals continue at its Dec. 1 to Jan. 3 pace, storages will still be about 61% full by April 1, way above historical averages, analysis by S&P Global showed.

No more extreme spikes

Nearer-term weather outlooks pointed toward mild weather conditions persisting into February, which reduced the risk of unseasonably low wind generation, with the German power front-month trading below where the day-ahead market has delivered over the past 90 days, according to S&P Global lead power analyst Sabrina Kernbichler.

Contracts delivering in Summer-23 and in Q4-23 continue to hold some risk premium given the less certain weather outlook and as Germany will lose some baseload run capacity with the nuclear exit in mid-April 2023. The German nuclear exit and low French nuclear generation will continue to expose the German market to price upside at times of low renewable generation, according to Kernbichler.

S&P Global analysts forecast that German demand will lag the 2017-21 average by about 6% in 2023.

"Both power and gas markets are now better prepared to deal with any supply or demand shocks versus 2022 in our view as Germany and other European countries have brought back coal units in 2022 and as gas markets are on track to come out of Winter 22 with higher storage levels...and with additional LNG infrastructure," Kernbichler said.

While S&P Global expects German power and gas prices to remain volatile in 2023, greater power and gas supply and demand flexibility will prevent extreme price spikes, which should exert further downward pressure on summer 2023 and Q4 2023 prices closer to delivery.