EU energy markets could break all-time near-curve price records set in 2008

Additional reporting by Chetan Patel

LONDON (ICIS)–Record low European gas storage levels, policy-driven carbon upside and unseasonably high demand in Asia is likely to push front-month gas and power prices to levels last seen in 2008.

A swathe of bullish fundamentals pushed EU gas and power front-months higher on Monday morning in early trade with an ICIS TTF front-month product breaching €30.00/MWh – the first time the global gas benchmark has done this since 2008.

If the TTF July ’21 settles above this level, it would break a 13-year record.

Driven mainly by the strength of gas, the equivalent German power baseload contract surged past €75.00/MWh. The last time any German power front month product settled above this was the November product in 2008.

Sluggish injection rates mean heightened injection demand is all but certain to remain throughout the rest of summer, bolstering Q3 ’21 gas and power contracts, which is likely to help front-month test all time highs in coming days and weeks.

However, one European power trader said that “it seems the market will remain tight over the summer, but what a correct price should be is a different matter altogether”.

Europe’s total inventories stood at 38.3 billion cubic metres (bcm) on Monday or just short of 39% full, slightly below what were then-record lows seen in 2018.

For facilities to reach their historical minimum going into a winter season of 77.5bcm as recorded in 2018, from Monday shippers will need to inject at an average rate of 12bcm/month.

In 2018 the average injection rate was 11.3bcm/month and the market entered the withdrawal phase in November 77% full. This suggests ample room for injection into November, supporting Q4 upside along with Q3.

ASIAN DEMAND AND NS2

In addition to storage demand, the global TTF benchmark will be influenced by increased competition with Asia.

A strong recovery in spot prices and surging demand in Asia has pulled flexible LNG supply into the Pacific basin which has prevented European storage stocks from being refilled at a higher rate.

However, some market participants expect that once the peak of Asian summer demand passes there could be a larger sell-off across European gas markets.

“How long is that [Asian] strength going to be there? If it does recede then there is not much left holding near term gas that high,” a European risk analyst told ICIS.

While storage and LNG are key bullish drivers, Nord Stream 2 has the potential to offset some of the upside risk, although one trader said there were “still a lot of questions” over the pipeline, adding: “I would be personally surprised if we would see gas flows before the end of this year.”

WINTER RISK

While the remainder of summer is expected to remain bullish, fundamentals have also supported strong buying on European gas and power Q4 ’21 products.

The main driver of this has been the expectation that injections will continue into the first half of winter, entering the typical withdrawals phase only 70-80% full.

The TTF Q4 ’21 has rallied 50% since the start of the gas summer, while the equivalent German power baseload contract has gained 30%.

Strong buying on Q4 ’21 contracts has helped erode most of the usual premium held by Q1 ’21 with traders suggesting there is potential for the relationship to flip completely.

On the TTF, the premium had fallen to €0.05/MWh on Monday from €0.50/MWh at the start of the gas summer.

CARBON PRICE RISK

EU ETS prices will continue to be a key price driver on gas and power curves throughout summer, with a bullish trend settling in driven in large part by policy developments throughout the summer.

Having established the €50/tCO2e level earlier this year, compliance participants appear to be prepared to buy in at this level in anticipation of further rising prices over the longer term.

A policy package expected to be proposed by the European Commission on 14 July will set further price direction, given the package will bring about significant changes to the EU ETS.

At the same time, interaction with gas prices will remain a key element to watch, as carbon and gas markets have provided strong support to each other over recent months.