Gas and power market update - November 2018

Welcome to BP's European Gas and Power (EGP) market update where we highlight the most recent trends in gas prices, forward curves, power spreads, storage, flows and the outlook ahead.

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EGP business insights

Trans Adriatic Pipeline (TAP) project remains on track. Latest updates on the project suggest 82% of the construction is complete and is on track for 2020 delivery of gas into Europe. Once complete, TAP will transport natural gas from the giant Shah Deniz II field in Azerbaijan to Southern Italy, allowing transport of Caspian natural gas into some of the largest European markets and further diversifying supply sources into the region. 

The Merger of PEG Nord and TRS hubs was completed on 1st November. France’s major gas exchange Powernext confirmed that the merger had gone smoothly, while the French energy regulator CRE has said that the suppression of the spread between the two hubs would drive a more competitive and liquid French market.
Solar projects were awarded full capacity in France’s first mixed auction. The entire 200 MW of capacity awarded in the auction went to 16 solar PV projects, with an average price of €54.94/MWh, while onshore wind missed out on a continuing theme of rising costs in the industry. Solar capacity in France has been lagging behind others in Europe but has seen a recent growth in capacity following a number of similar auctions held throughout 2018.

Latest Ofgem price cap puts pressure on UK REPs. A new price cap to be implemented from January 2019 has put further pressure on a number of UK retail energy providers. This comes as news that a number of Renewable Obligation Certificates (ROC) payments were still outstanding, while at the same time household energy debt is increasing and wholesale costs have risen significantly.

Commodities soften

Brent sold off sharply from its high of $86/bbl on 3rd October, to a low of $65/bbl on 13th November. The downtrend was felt across the wider commodity complex, with weaker sentiment in the prompt pushing JKM down to ~$10.40/MMBtu, whilst TTF has come down 10% since September to ~€25/MWh.

US Gas supported by low inventories

Henry Hub found strength however, as the US enters winter with stocks below the 5-year average.
The US market is typically accustomed to prices around $3/MMBtu, but these have recently risen sharply to a 4-year high of $4.80/MMBtu, reflecting the risk that the market could be exposed to potential weather shocks this winter.

Emissions volatility

After falling almost 28% throughout October, EUA carbon futures have since recovered towards the €20/MT mark. Coal has also seen some weakness, recently falling towards $90/t however October prices were still on average 10% higher than last year.

Mild temperatures continue

October temperatures remained broadly in range with the seasonal average, with a slight skew towards the warmer side. This is reflected in below average heating degree days for Belgium, Italy, France and the Netherlands. The ongoing shoulder season (Sep-Nov) has fed the weaker demand backdrop, as the market transitions between summer cooling and winter heating.

European storage sees record build

Milder weather and ample supply from high LNG send-outs and Norwegian deliveries has enabled European storage to continue building into November. After significant draws earlier in the year, Europe has seen the strongest seasonal build in recent years, totalling 70 bcm since April, which is notably higher than the seasonal builds of 57 bcm in 2016 and 64 bcm in 2017.

Injections hold strong across Europe

European storage injections built throughout October, ahead of the winter months when inventories typically draw. After significant builds throughout the summer, France has now levelled off at the top of the 5-year range, whilst UK stocks are nearing full capacity.

LNG send-outs soar as stocks hit recent highs

Favourable economics has directed LNG flows into Europe, which has resulted in high stock levels and a surge of send-outs. UK send-outs peaked at 68 mcm/d at the end of the October, significantly above the May to September average of 8 mcm/d.

Strong freight is keeping LNG within Europe

Strong demand in Asia and the requirement for floating storage has caused a significant increase in shipping demand, which has sent charter rates climbing to record highs. These higher shipping costs make re-exporting LNG to Asia unattractive, hence October saw a drop in European reloads.
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