Gas and power market update - October 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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BP’s North Sea Rhum gas field sale to Serica advances. This month Serica stated that they have received assurances and a new conditional licence from the US Office of Foreign Assets Control (OFAC) which ensures that production from the Rhum field can continue. that Subject to fulfilment of the conditions, non-US entities providing goods, services and support will not be exposed to secondary sanctions which had brought the asset sale into jeopardy. 

Shale gas fracking operations have begun in Lancashire, UK. A High Court ruling on Friday  (12th October) ruled against environmental campaigners and in favour of allowing operations to begin at the Preston New Road Site near Blackpool. The shale gas volumes are expected in the first quarter of 2019
In the event of a ‘no deal’ Brexit, a UK government report stated that the UK would likely be removed from the EU Emissions trading Scheme. However, it is expected that the UK government will continue to maintain the existing carbon pricing commitment through a ‘tax system’ which would mirror the current EU Emissions Trading Scheme and have a floor price inline with the current £18/tonne level.  

This month the Spanish Minister of Energy Transition announced that there would be a six month suspension of the 7% generation of power tax and also on the ‘gas fuel tax’. Both measures come in light of recent 10 year high Spanish power prices, in an attempt to reduce whole prices which will be passed onto domestic customers.

Commodities strength continues

Strength in the wider commodity complex and a tight LNG market has supported gas and LNG prices, whilst carbon has now levelled off at around €20/mt. JKM continues to be particularly strong although weaker sentiment in the prompt has brought Dec, Jan and Feb JKM swaps contracts back below oil parity.

Elevated hub prices and volatility

Additional fundamental tightness in gas and LNG markets has pushed the mid-term curve into stronger backwardation. The Cal-2019 – Cal-2020 spread at TTF has increased from €0.92/MWh six months ago to €2.20/MWh currently.

Rising cost of coal supports gas prices

The rising cost of coal fired power generation is giving support to gas fired power generation and keeping gas demand buoyant. Following the upward trend in EUAs, coal has climbed significantly this year to trade around the $95-100/t range, adding to the European gas rally

German spark spread retracts to negative territory

Power prices in Germany continue to climb on the back of strength in coal and European gas. Since May 2018 there has also been an upward trend in both spark and dark spreads, however September saw the German clean spark spread retract to -€2.47/MWh whilst the clean dark spread remained positive.

Reflecting on the hot summer

Temperatures across Europe hit record highs in 2018, meaning cooling degree days were significantly above average. Dutch cumulative CDDs were 91% higher than 2017 and 23% above the historical 2002-2016 range, which is indicative of the high temperatures felt across NWE. Whilst this supported power demand for cooling over the summer, temperatures in September dialled back and the focus now shifts to HDDs for the winter.

JKM-TTF Narrows

Lower seasonal demand in the East has seen the JKM-TTF spread narrow to less than $2/MMBtu from $2.80/MMBtu in August. In addition, shipping rates have been reported as high as $180k/d, which resulted in more cargoes coming into Europe in September. However, with terminals at full stocks European send-outs remain high. In particular, send-outs rose 3.4mcm/d month on month in the Netherlands and 4.4mcm/d in Italy.

Russian pipeline supply remains high

Following the seasonal maintenance which added support to prices over the summer, Russian pipeline flows into Europe are back on their higher trend which has now been sustained for 12 months. This is reflected in the Nord Stream pipeline flow, which is indicative of total Russian flow.

Storage injections continue into October

Seasonally low demand and strong LNG send-outs have seen European storage injections continue into October. The year on year deficit now stands at 1.47 bcm, down from 4.2 bcm last month.

Germany and Netherlands catch up

Storage injections have increased across the board, with the year on year deficit narrowing for both Germany and Netherlands as pipelines come out of maintenance season. French storage continues its strong growth and is now 1.72 bcm higher year on year.
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