The mild start to winter has significantly impacted gas and power demand for heating across Europe. However, temperatures are now beginning to drop, signalling a potential increase in energy needs. Despite geopolitical tensions and supply challenges, German power front-year prices have reverted to levels reminiscent of the pre-Russia-Ukraine-War era. This situation reflects the complex interplay of factors influencing the market, including cold weather risks, the Middle East conflict, Russian gas flows, and intense competition for LNG cargoes. While a slight risk premium exists on gas prices, we at Volue observe the high capacity of gas storage and weak demand in residential and industrial sectors, providing a cushion against immediate supply shocks. However, Europe's increased reliance on LNG also highlights its vulnerability to global supply dynamics.
Contrastingly, the profitability of hard coal in Germany, compared to gas, is reshaping the energy mix. Gas plants, operating at 50% efficiency, find profitability mostly only during peak hours. Consequently, hard coal in Germany is proving to be more profitable, potentially encouraging more gas-to-coal switching.
The weather forecast from the ECMWF predicts mild and wet conditions in the UK and Europe for the first quarter of 2024. This weather pattern is expected to suppress heating demand and influence hydrological conditions. While CWE reservoirs are robustly at 82% capacity, the Nordic region's reservoirs are slightly below normal but still in a better position than the previous year. Additionally, renewable energy production, particularly solar, has seen significant growth, with a 16% increase in renewable output expected in the first quarter of 2024 compared to the same period in 2023.
From a demand perspective, European consumption trends reveal a level below average compared to last year, indicating a slow, ongoing recovery from the post-COVID era. Particularly, the energy-intensive industry sector in Germany shows very limited signs of recovery, having mostly stagnated throughout the year. With Germany’s industrial sector still grappling with recession, no significant demand increase is anticipated in the next year. France exhibits a slow but steady industrial recovery. Furthermore, the UK’s industrial demand remains stable, but household consumption is low, with no immediate recovery to pre-COVID levels in sight.
Altogether, we at Volue believe that the different market drivers paint a cautiously optimistic picture. The winter start, although mild, is now giving way to colder temperatures. Yet, the overall forecast remains higher than normal for the coming months. European gas storages are comfortably filled, with no excessive risk premiums on gas prices, especially considering the geopolitical context. Also, French nuclear availability has notably improved compared to last year, offering approximately 10 GW more, suggesting a stable supply backbone for CWE.
In terms of price forecasts, both Volue's short-term and mid-term technical outlooks lean slightly bearish. For the forward price perspective, January might see a slight price increase, expected to decline from the second half of February. Cross-border spreads for the calendar year 2024 also show a neutral to slightly bearish trend, indicating a stable but watchful market environment.
