Bullish gas puts squeeze on European November clean spark spreads

LONDON (ICIS)–November ’20 clean spark spreads in key European markets have shed 48-119% percent of their value since the beginning of September with bullish natural gas prices eroding potential profit margins for CCGTs.

The German spread was the only value to turn negative during this period, helped by the expectation of high wind output at the start of next month.

GAS SUPPORT

The expectation of declining LNG arrivals into Europe and greater reliance on storage this quarter has contributed to rising gas prices for November delivery.

The Dutch gas TTF November ’20 was assessed at €14.80/MWh on 27 October, 11% above its assessment on 1 September.

Recent ICIS analysis highlighted that firmer demand for the Asian pacific basin has pushed the ICIS East Asia Index (EAX) above TTF values in recent weeks. Late winter stockpiling has underpinned the interest in East Asian buyers, increasing the incentive to take cargoes out of the Atlantic basin.

LNG vessels into Europe for October, excluding Turkey and the Nordics, reached 63 on 28 October, down 17 month on month and 35 year on year.

Fewer incoming cargoes and dwindling LNG sendout will put pressure on European storage which was 95% full on 26 October, three percentage points below 2019 levels. High TTF prompt values have supported ongoing storage withdrawals.

In early October, fears of prolonged disruption to Norwegian gas pipeline flows into Europe boosted shorter-dated gas contracts. In recent sessions bullish factors have included an extended outage to Norway’s 4.3mtpa Hammerfest LNG plant into October 2021 and a brief unplanned outage to the Kollsness processing plant on 27 October.

LIMITED CONCERNS

Fewer supply concerns in key European electricity markets have limited the upside for November ’20 power contracts, enabling the squeeze in spark spreads.

A mild start to the winter has stifled weather-driven demand. The latest short-term weather forecasts from MetDesk show that temperatures in the UK, Germany, Italy, Netherlands and France will be above seasonal norms until week 46 when levels will be at seasonal averages.

Regionally, French margins have been bolstered by high precipitation which has boosted reservoir levels. Stocks have been above 2019 levels throughout the year, according to ENTSO-E. Confidence in nuclear supply this winter has also improved since late summer with availability set to be 73% in November, two percentage points above the 2015-2019 average.

German margins have been strengthened by high wind output in recent weeks, a trend which will last until early November. ICIS models show that hourly wind outturn will hit 39GW on 2 November before tailing off for the rest of the week. MetDesk predicts output will broadly be in line with seasonal averages next week.

Weakness in the wider energy complex has also weighed on power relative to gas. Carbon, oil and coal have all shed value in recent weeks.