Observers of the French and Spanish gas markets over the last few months cannot have failed to note a mounting challenge to the traditional price structure in the region.
LNG – both in terms of quantity and price – has played an important role in the recent shift.
While historically Spanish AOC hub prices have been at a premium to prices in the south of France (today represented by the TRS hub), the south of France at a premium to the north, and all three priced above the key Dutch TTF hub, these relationships are no longer a given.
In France, strong LNG deliveries in the first half of 2016 to date are a big part of the equation. Excluding recent days, when strike action completely halted flows at the southern Fos terminals, LNG send-out into the TRS zone has averaged 16 million cubic metres (mcm)/day, compared with 13mcm/day during the same period of the previous year.
As well as the actual increase in LNG supply, the perception that cargoes will continue to be plentiful has undoubtedly helped to keep the price at TRS low. Since January, ICIS has assessed the TRS Day-ahead at parity or a discount to the PEG Nord equivalent on 15 occasions.
Mild winter weather has also contributed, leaving storage more full than usual at the start of the injection season and suppressing demand.
Looking further south, Spanish gas prices have been dragged down by cheap oil feeding through to LNG contract prices. This is arguably an even bigger factor for Spain than for other European gas markets, as much of the gas entering the country is under long-term contracts with a six-month lagged indexation to front-month Brent crude prices.
AOC June ’16 in early May was trading below the corresponding TRS product, while the premium of AOC to the TTF equivalent averaged less than half a euro so far in May, compared with €1.30/MWh during April.
In a longer-term trend, the premium of TTF to PEG Nord on longer-dated contracts has also been steadily eroded over the past year. The PEG Nord front season was assessed an average €0.137/MWh above the TTF front season during May to date, compared with €0.345/MWh in the same period of 2015.
This is less directly linked to LNG flows, but nevertheless has been aided by weaker demand further south, along with restrictions on Dutch production at the Groningen field that have supported the TTF side.
Is this the new normal or a short-lived phase? Much will depend on the extent of any bullishness at the TTF as shippers fill up storage sites during the summer. LNG arrivals to France are also a key factor – the country should gain a new source of supply soon, in the form of the Dunkirk terminal, although it’s unclear how many cargoes will really arrive. Finally, peak summer gas demand in Spain, where generation tends to ramp up for air conditioning needs, will also be crucial.