Winter outlook: Central and Eastern European power and gas

The energy markets of centraleastern Europe are braced for potential strain this winter, particularly in Q1 ‘18.

Low Balkan hydropower stocks could stretch Hungary by reversing the usual flow direction in the event of a prolonged period of cold, while a major Czech nuclear loss will give regional traders further reason to guard against being caught short.

Regional natural gas prices will be driven by lower storage stocks compared to 2016, while continental fundamentals will also impact gas markets.

Power

Winter risk for the centraleast European power markets is priced mainly into the Q1 ’18 product this year, with Q4’17 having expired at a discount to contracts for delivery next quarter.

While the Czech Q4 ’17 Baseload expired at €38.40/MWh, the Q1 ’18 Baseload was last assessed by ICIS at €41.25/MWh.

The Hungarian Q4 ’17 Baseload expired at €48.50/MWh, a major discount of €7.00/MWh to the most recent assessment of Q1 ’18 Baseload.

The reason behind the premium on Czech Q1 ‘18 is clear cut, as a 1GW unit at nuclear power plant Temelin will be in maintenance for almost the whole of the first quarter.

The Hungarian Q1 ’18 have more risk premium in part because of the events of winter 2016-17, when extremely cold temperatures in the Balkans pushed prices to record highs in January and February.

The Balkan countries are usually a main source of electricity imports for Hungary, but with hydropower reserves currently extremely low in these countries, Balkan supply may not be sufficient to reign in potential first quarter price spikes.

Some market participants said Serbia and Romania are likely to draw power away from Hungary, driving the Hungarian price higher in the process.

The current German Q1 ’18 premium over Q4 ’17 expiry is also bullish for both the Czech and Hungarian Q1 ‘18 products. Traders have pointed to a bullish outlook for the German front quarter as supporting these markets because the region also sources imports from Germany.

But forward prices have in recent months failed to reflect the delivery value, with the forward market underpriced. The Hungarian Q3 ’17 Baseload delivered €6.19/MWh higher on average than its value at expiry, while the Czech equivalent delivered at an average €2.10/MWh premium to expiry.

And recent sessions on the spot market in both Hungary and the Czech Republic suggest fourth quarter expectations were on the low side. The Hungarian day-ahead delivered above Q4 ’17 expiry on average in the first few sessions of the fourth quarter. ellie.chambers@icis.com

Gas

Austrian storage sites opened the gas winter 78% full, which was 22 percentage points less compared to 2016. This was a result of high Austrian prompt prices during the summer as large Italian demand prompted shippers to sell spot volume instead of injecting into storage units.

But lower Austrian storage stocks will be bullish for Austrian prices this winter, especially in the second half, when supply is less available and prices tend to be higher.

Italian gas demand for heating and power generation during the winter will be another driver of the Austrian VTP. Despite full Italian storage sites at the beginning of the winter, strict Italian storage regulations, which limit storage flexibility by daily and monthly withdrawal caps, mean Austrian spot volumes on the TAG pipeline will be a key supply source for the Italian PSV.

Shippers on the PSV will be more dependent on volumes traversing Austria due to maintenance on the TENP pipeline, which delivers western European gas to Italy via Germany and Switzerland. The outage is expected to limit capacity by 50% until summer 2019, which may also support Austrian volume through the TAG in the long-term.

As in 2016, Austrian gas-fired power production may also impact Austrian gas prices this winter, because gas-fired generation will again be largely used to balance the country’s electricity grid in times of high demand due to low run-of-river power production.

Czech gas storage facilities were 94% full on 1 October, which has climbed to 100% since, making the Czech Republic less dependent on German supply. But the direction of German NCG prices will impact Czech equivalents.

French nuclear availability, which could be low again this winter, will also influence German gas-fired production which will also filter through to the Czech gas market.

Low Slovak storage stocks, which will limit flexibility in periods of high demand, will make shippers more dependent on Russian and Czech supply.

Hungarian storage facilities were 70% full on 1 October, up 18 percentage points year on year. Russia’s Gazprom injected 900 million cubic metres of gas into Hungarian storage units for the gas winter, while the country also has 1.2 billion cubic metres of strategic storage stocks for greater security of supply.

Both markets will be also driven by gas demand in Ukraine. Since 1 October, Slovak and Hungarian exports to Ukraine dropped due to lower Ukrainian storage injection demand. This suggest that cross-border flows to Ukraine may ramp up in times of higher demand as the country might draw on its storage stocks later in the gas winter. david.simon@icis.com