Corrected: Supply risk squeezes Dutch gas summer/winter price spread

(The final three paragraphs of this story have been removed as they contained incorrect calculations. The third graph has been corrected.)

A draw-down on gas stocks and lingering supply uncertainty for the second quarter have pushed the price difference between the forward Dutch TTF summer and winter contracts to more than a decade low.

The TTF Winter ’17 contract has been assessed less than €1.00/MWh above the Summer ’17 on average since 30 January and is yet to show any signs of recovery early in February.

This time last year, the forward summer/winter price spread was widening, as comparatively full European storage sites pressured the front summer, while rising oil prices provided relative support to the front winter.

The recovering winter premium in the first quarter of 2016 also resulted in a spell of strong liquidity on the spread, which has so far been absent early in 2017.

One trader said he could not see the spread contracting any further.

“I do not know all the metrics of the spread for storage operators, but I think that a winter premium below €1.00/MWh to the summer is going to be tough for some,” he said.

“I do not see any downside for the spread, but a big potential upside in the event that we see a bit more flexibility, like LNG, coming to the market.”

Storage

This year the oil price has been more stable than early in 2016, offering little support to the front winter. Aggregate gas stocks are around 1.5 billion cubic metres (bcm) lower than last year and roughly 1.3bcm below the four-year average.

If withdrawals were to continue in line with the four-year average for the remainder of the winter, the deficit could increase to as much as 1.6bcm, ICIS analysis shows.

This is feeding strength to the summer contract as it implies a larger injection demand than in 2016.

Q2 risk

In addition to growing summer injection demand expectations, Groningen low-calorific gas (L-gas) fundamentals and the near-term outlook for European LNG supply has helped to drive up TTF summer gas contracts and the Q2 ’17 product in particular.

ICIS has assessed the TTF Q2 ’17 contract as much as €0.725/MWh above Q3 ’17 earlier in February, with the spread between the summer pair much wider than in previous years.

LNG supply to Europe has been particularly scarce this winter, as high prices in Asia have attracted flexible global supply to the Pacific basin since September 2016.

The focus is expected to shift away from Asia in the coming months, but this does not mean a large increase in LNG supply to Europe will necessarily follow. Rising demand in the Middle East and South America early in the summer could mean European prices remain uncompetitive in the global LNG market and restrict deliveries to northwest Europe early in the summer.

Fundamentals associated with the Groningen gas field in the Netherlands are also far from certain, especially following an unseasonably cool winter to-date.

Annual production from the field has been capped at what would be a ten-year low of 24bcm, based on the volume of Groningen gas that is expected to be needed in an average-temperature year.

The cap could be increased proportionally in the event of below-average temperatures across the year, but it is difficult to predict with certainty this early if such an increase will be permissible.

The Dutch government assesses temperatures based on the number of degree days in the year. A degree day is a measure of how far the average wind-adjusted temperature of a given day falls below a 14°C household heating limit.

The reading is taken in De Bilt and there are 2,300 degree days in an average temperature year, according to the Groningen production plan. jake.horslen@icis.com