Hike in forecast Q4 2024 natural gas demand helps keep markets on edge

As Europe enters the fourth quarter, and the official start of the gas winter, markets remain on edge, with the expiry of the Russia-Ukraine gas transit deal at year-end in sharp focus.

While gas demand is still well down on pre-2022 levels, any new supply disruptions, increased competition from Asia for LNG cargoes or a very cold start to winter could still test market resilience.

Prices also remain relatively high, reflecting market jitters, with Platts -- part of S&P Global Commodity Insights -- assessing the TTF month-ahead price at Eur37.75/MWh ($42.24/MWh) on Sept. 27.

This is despite EU storage sites being almost full at 94.2% of capacity as of Sept. 28, with a mild October likely to see stocks reach close to tank-top as Norwegian maintenance winds down.

Overall demand levels in Q4 will be key. Commodity Insights forecasts demand in the EU27 and UK at some 1.228 Bcm/d in the quarter, which would be a 6% increase year on year.

Demand in the residential and commercial sector is expected to increase 7% assuming a return to normal weather, while industrial demand is set to improve by 3% on the year.

Demand in the power sector is expected to remain relatively weak in Q4, however, a continuation of the pattern in place since 2023 as increased generation from renewables, nuclear and hydro all squeeze thermal generation.

The market is also preparing for the potential end of Russian gas supplies via Ukraine, with the five-year transit agreement between the two countries set to expire at the end of the year.

Some 42 million cu m/d of Russian gas is still supplied to Europe via the Sudzha interconnection point on the border with Ukraine, including to the Transnistria region of Moldova.

Alun Davies, Commodity Insights' research and analysis director, said Ukrainian transit flows remained a significant source of risk to the market.

This was both in terms of "potential disruption ahead of year-end but also in terms of the uncertainty around flows continuing in 2025 after the expiry of the current transit arrangements,” he said.

Davies added that storage would be expected to work harder than it did the previous winter, with most of the additional withdrawals taking place in Q1 2025 rather than Q4 assuming Russian transit flows through Ukraine stop.

"This points to a price risk in Q4-24: if weather is colder than expected, storage will be reluctant to withdraw so early in the season to help balance the market unless prompt prices rise sufficiently to offset the risk to the balance later in the winter," he said.

Azerbaijan has been in talks with Moscow and Kyiv on a potential role in facilitating continued transit via Ukraine but it remains to be seen whether any new arrangements can be put into place before the end of the year.

If flows are suspended, the only route to Europe for Russian pipeline gas will be the TurkStream pipeline, which continues to flow at elevated levels.

Europe will also still need LNG to continue to arrive to meet winter demand.

Commodity Insights forecasts LNG imports to the EU and UK in the fourth quarter at some 362 million cu m/d, down 6% year on year but higher than the year to date.

Europe has also deployed new floating LNG import infrastructure since the Russian invasion of Ukraine and more FSRUs are set to be ready for operations in Q4.

The much-anticipated Alexandroupolis FSRU is to begin commercial operations on Oct. 1, while two more FSRUs are expected to be start up in Germany -- one at Stade and a second FSRU at Wilhelmshaven.

However, given relatively low utilization at Germany's existing four FSRUs, it remains to be seen if the two additional FSRUs will begin operations before end-2024.

French nuclear 'back to normal'

Commodity Insights forecasts a 2% year on year increase in electricity demand in Q4, but the supply side is positioned to shrug this off on healthy nuclear generation.

It could be wind topping the power mix across major markets, however, Europe set to add around 15 GW of turbines this year, with current total capacity of 280 GW up 6% YoY.

“Although we expect higher wind capacity to lead to greater price volatility, the hourly price profile remains led by solar," said Kerry Thacker-Smith, senior European power analyst at Commodity Insights.

Meanwhile French nuclear is back to normal after successive winters of underperformance.

Further, “we don’t expect French cross-border constraints of a similar magnitude to those during the spring, while hydro dams are historically high in the French Alps and Iberia,” said Christelle Wynants, head of global market analytics at the French energy group ENGIE’s GEMS unit.

The French-German price spread would remain significant in Q4, she said in emailed comments: “The recoupling of Germany and France could be for Q1.”

French Q4 baseload power settled Sept. 26 at Eur76.77/MWh, EEX data showed – a discount to all surrounding markets with only Spain on par with France.

France is on track for record power exports with Italy and Great Britain the biggest buyers. Platts, part of Commodity Insights, last assessed UK Q4 baseload at GBP80.70/MWh (Eur96.84/MWh).

Combined nuclear, wind, hydro and solar supply across ten European markets is forecast flat on year, keeping the share of combined gas, coal and lignite-fired generation at around 23% of the total.

“While we expect gas generation to remain relatively flat vs last winter, this is in the context of a 29% fall in output last Q4 vs the 2018-2023 average. A repeat of last winter’s exceptionally mild, wet and windy conditions would deliver a further drop in output,” said Glenn Rickson, head of European power short-term analytics at Commodity Insights.

Coal and lignite are set for new historic lows amid further plant closures.

Great Britain’s last coal plant, Uniper’s 2-GW Ratcliffe closed Sept. 30, while most German coal and lignite units that returned during the crisis already closed in the spring with some 10 GW less coal capacity this winter.

"Further closure of coal plants will see the thermal price stack steepen and with a greater reliance on gas plant during the tightest hours we expect a stronger feedback loop into gas pricing," Commodity Insights said.

Carbon forecast to rebound

EU ETS carbon prices fell almost 10% in September but analysts and traders expect the fourth quarter to see a gradual price uplift buoyed by returning demand, colder weather and firmer gas prices.

Analysts at Commodity Insights see EU Allowances ranging between Eur70-Eur80/t in Q4 2024, reaching Eur83/t in early-2025.

Prices would be supported by the stability of gas price trends, power demand, along with "the evolving dynamics of renewable energy,” the analysts said.

"Carbon is expected to continue to take a cue from gas, for which the price formation depends largely on traders’ assessment of the geopolitical situation," analysts at Veyt said in a recent note. "Any development on the possible transit of Azeri gas to Europe will affect gas prices, as could a further escalation in the Middle East."

While bearish sentiment on UK Allowances has persisted for some months now a recovery is seen as likely in the last three months of 2024.

Recent data show UK economic growth edging up, with a rebound in power demand expected.

Analysts at Commodity Insights expect a 3% winter-on-winter lift in power consumption, in part underpinned by the unusual mildness of last winter.

“We anticipate a marginal increase in [UKAs], with trading expected to be in the range of GBP42-GBP50/t from September to December this year and approaching nearly GBP55/t in January-February 2025,” they said in a recent note.

The spread between EUAs and UKAs has narrowed marginally, with the former trading at a premium of Eur20.04/t in Q3 versus Eur21.03/t and Eur19.18/t in Q2 and Q1 respectively.