Europe's gas jitters set to persist into Q3 despite healthy storage position

Despite high stocks and subdued demand, the European gas market remains jittery and mindful of the potential for unexpected supply shocks through the third quarter of 2024.

Prices remain relatively high, reflecting market nerves, and have risen by 50% since a recent low in February.

Platts, part of S&P Global Commodity Insights, assessed the TTF month-ahead price at Eur34.03/MWh ($36.39/MWh) on June 26 compared with just Eur22.95/MWh on Feb. 22.

Still, EU storage sites are already around 76% full and -- despite expectations of a relatively slow injection rate over the summer -- are set to hit the EU's 90% fullness target well ahead of the Nov. 1 deadline.

Indeed, Commodity Insights analysts expect storage sites to be 100% full by the end of October, with LNG imports set to rise from their recent lows, albeit forecast to be 4% lower year-on-year in Q3.

"We are seeing early signs of this LNG import recovery," Commodity Insights' research and analysis director Alun Davies said. "There is recovery in global LNG production and utilization is now trending above the five-year range."

Assuming supply recovers, prices during Q3 would be expected to drift down from current levels but remain supported within the coal-gas switching range, Davies said.

Norway, meanwhile, remains a risk factor and is set for a heavy planned maintenance schedule from late August until the end of September, which will take up to 160 million cu m/d of capacity offline.

"The market will be watching flows from Norway carefully for any sign of maintenance being more significant than planned," Davies said.

European gas prices were supported last summer by extended maintenance at the Nyhamna gas processing plant.

"Any fall in the rate of supply coming into Europe in Q3 compared to what is currently expected will hamper rate of storage fill and increase prompt prices to make up the volumes for the balance of summer," Davies said.

Traders also pointed to US LNG export risk with the potential for hurricane-related disruption.

"I am mainly bearish with some sort of risk premium that will last until the start of the [US] hurricane season and the Norwegian maintenances in September," a France-based trader said.

"The system will remain tight and there are many things to monitor," a Spain-based trader added.

Sentiment will also be tested by news around the future of Russian gas transit via Ukraine.

The five-year transit deal is set to expire at the end of 2024, but Slovakia and Hungary in particular are keen to see transit flows continue in some form.

On the demand side, European consumption is set to remain weak, particularly in the power sector, with Commodity Insights forecasting only a 0.3% year-on-year increase in total demand in Q3.

In the industrial sector, demand has started to show growth since March with sectoral gas demand up 9.4% in the year to date, led by chemicals and refining.

This is being largely offset, however, by continued structural weakness in gas-fired generation.

Thermal gap squeezed by solar, hydro

In power, strong solar, hydro and nuclear fundamentals ensure Europe's power markets are well-supplied this summer, with few signs of structural demand increases.

Q3 2024 supply from solar, hydro, nuclear and wind is expected to be 14 GW higher versus Q3 2023, with coal- and gas-fired output set to fall below 20% of the mix, according to Commodity Insights analysts.

"It is system length that pervades our forecast as demand in Europe's two largest markets – France and Germany – continues to lag expectations," said Glenn Rickson, head of Commodity Insights' European power short-term analytics.

While prices are expected to rebound from the lows seen in spring, they are likely to remain muted compared to recent summers, cushioned even in the event of a heatwave by strong hydro stocks, under-utilized thermal capacity, and the depth in the French nuclear fleet, Rickson said.

Demand is forecast to rise by 0.7% year-on-year to average 223 GW, assuming seasonal average temperatures, while solar alone was set to boost Q3 supply by 6 GW.

Solar growth brings its own challenges, with the number of negative hourly prices logged in the first five months of 2024 exceeding last year's total.

Conversely, evening peak hours remain pricey amid occasional spikes and as participants seek to make flexibility pay.

After years of stress corrosion outages, France's nuclear fleet has returned to form this year with output rising above the five-year average.

Neighboring demand for cheap French surpluses has led to grid operator RTE having to curtail flows on its eastern borders. This issue was a key driver for French forward contracts in June, and Commodity Insights analysts expect this effect linger into Q3 and beyond.

Finally, amidst elections and the Paris Olympics, startup of EDF's 1.6-GW Flamanville-3 reactor will bolster France's nuclear strength heading into the autumn.

Carbon drivers weaken

The European compliance carbon market approached the third quarter of 2024 in bearish mode, nearest December EU allowances down 10% in value between June 1-27.

Fundamentals remain weak with EU renewables regularly breaking records, squeezing the thermal gap and reducing any emissions impact from potential gas to coal switching.

Power demand is another factor. In May there was some hope of a recovery in Eurozone economies but the latest Purchasing Managers' Index data are disheartening.

HCOB flash manufacturing PMI index fell to a six-month low of 46 in June, down from 49.3 in May. The index is published by S&P Global and Hamburg Commercial Bank.

The setback "was compounded by the fact that new orders, which typically serve as a good indicator of near-term activity, fell at a much faster rate than in May," suggesting a recovery may be further off than expected, said HCB's chief economist Cyrus de la Rubia.

One factor that could reverse the downward trend for EUAs could be warmer temperatures in Q3.

"The expected hot summer is anticipated to increase energy demand for air conditioning, so boosting carbon prices up," SAID Monna Dimitrova, research lead at Homaio, an investment platform for carbon allowances. "Also, as we enter the season of LNG plant maintenance, supply pressures could intensify, further bringing up gas prices and, consequently, EUAs."

UKAs meanwhile have fallen back after a pre-election rally based on the expectation that a new Labour government would seek to link the UK's compliance market with the EU ETS.

"The fact is that an opposition victory in the election should not be interpreted as a guaranteed green light for linking the UK and EU ETS markets, simply because the EU could easily decide the policy gap is too wide," said analysts at Carlton Carbon, forecasting an oversupply of UKAs to at least 2026.

The spread between EUAs and UKAs has narrowed significantly, however, with the former trading at a premium of around Eur10/mt over the latter in late-June.