Forward prices have declined to levels last observed in Q1-22. Seasonal price spreads have normalised in tandem with the price declines to a typical market dynamic where summer contracts trade below the winter. This signals a lot of the short-term risks have been removed in contrast to last year where the immediate summer months were trading a lot higher compared to the longer dated contracts.
The price reduction is linked to a 17% decline in total demand from the 5-year average over the winter period across the UK and NWE with the strongest reductions seen in the industrial sector and domestic heating due to the warmer weather conditions and healthy renewable output for power generation. Looking forward there could be some price support from higher gas for power demand due to lower nuclear output in Germany, France and Belgium. Impact of a hot summer could also cause river levels to drop causing transportation issues and increasing risks of hydro generation capacity and cooling nuclear units.
Lower storage withdrawals rates have put Europe in a great position to refill storages which currently sits at 56% of available capacity compared to the 5-year average at 35%. Based on the recent injection rates and availability of supply, European gas storages are expected to be at least 90% full ahead of the 1st November deadline. In the UK, the reopening of the Rough storage facility added further security of supply which increased total storage capacity by 50% with a further 13% increase expected this winter.
A positive storage picture is also attributed to reduced demand from China that has allowed Europe to remain a premium market to attract LNG. It is expected that global LNG demand excluding NWE will increase by 6bcm year-on-year with China accounting for half of this demand growth. Global LNG supply is expected to increase by 3.7% or 10bcm of which the U.S will account for most of this supply growth following return of the Freeport LNG facility ramping up to full capacity.
Looking ahead, demand cuts and record high LNG imports would need to be maintained over summer given potential supply-side risks that could support prices.
Norwegian gas flows to the UK are below the 10-day average due to the summer maintenance. The peak maintenance period is scheduled from 19th May to 13th June and any unplanned or extensions to these outages could exacerbate the situation. UKCS production is also expected to steadily decline as high windfall taxes continue to deter investment.
Six weeks of strikes have hampered output and maintenance across France’s fleet of 56 reactors, impacting 16% of power production and bringing the total nuclear capacity down to 60%. Three LNG terminals in the region were also impacted however nominations are being seen at reduced levels. Discovery of cracks in some reactor cooling pipes also caused capacity issues with the regulator concerned that some inspections would not be carried out until 2024.
Meanwhile the European Union is mulling options to forego Russian LNG which could curb supplies at a time of rising demand. Significant amounts of Russian LNG continued to arrive into Europe over this winter. Whilst a ban would reduce cargos arriving into Europe, it remains to be seen if Russian LNG being diverted to other regions, such as China, could result in less global competition for cargos from other regions such as the Middle East.
In the wider energy complex, Brent oil was down almost 21% since the beginning of the year mostly driven by risks in the global banking sector leading to rising interest rates that sparked fear of an economic slowdown and reduced fuel demand this year. The path of monetary policy remains uncertain, especially as regulators act to prevent more fallout in the banking sector.
The recent support for oil prices has come from OPEC announcing to cut production by 3.7% of global demand. The IMF highlighted the risk this poses to global economic expansion as models show that for every 10% rise in the price of oil would lead to a 0.1% reduction in economic growth and a 0.3% increase in inflation.
However, the IEA expect world oil demand to grow by 2mbpd in 2023 to a record 101.9mbpd, driven in most part by stronger Chinese consumption whilst global oil supply is expected to fall by fall by 400,000bpd by the end of the year.
The UK and European carbon market prices have diverged with UKA’s shedding just over 2% in value whilst EUA’s have appreciated by 9% since the start of the year. Increases in the European market have been linked to the European Commission announcing that REPowerEU are tentatively envisaged to start July 2023.
The EU plans to raise €20 billion in grants from its carbon market by front loading permits and sales from the innovation fund. However, the auctioning regulation needs to be amended for the additional innovation fund volume. This implies lower than expected extra EUA supply entering the market this year. Auction demand ahead of the April EU ETS compliance deadline will continue to provide price direction along with the new verified emissions data and vote on the ETS reform trialogue agreement. Looking forward the forecast EUA price for 2023 is expected to average €70/tonne.