Natural gas "thought of the week"

April 5, 2017

The research team gives it medium-term view on weather and its potential implications on the European energy market.

 

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  • It is the beginning of the month and it has become now a “tradition” to focus on the medium-term view on weather and its potential implications on the European energy market. Despite the fact that, originally, the weather outlook was mainly confined to the electricity research notes, it has become clear this has significant effects on the gas market as well.
  • Our past weather outlook was overall a “hit” (see the power research note published at the end of February). Europe (its eastern sectors in particular) ended up warmer than average. The renewables input (wind in particular) strongly contributed in loosening supply, following the “thread” commenced towards the end of February. However, a large-scale circulation change has taken place since March the 20th, whereby anti-cyclonic conditions have been more aggressive over the continent. The net effect was a tightening in supply as wind has substantially decreased while the PV source, despite a clear increase, is still far from the summer peaks.
  • What should we expect for the forthcoming weeks? Compared against the previous month forecast, differences in temperatures are not very big. The largest deviations from the norm are still seen to occur over eastern Europe. The more aggressive outlook (#2) suggests warmer than average conditions may extend over central Europe as well (including Germany and parts of eastern France).
  • Wind-wise, the largest anomalies are confined over northern and south-western Europe – winds are set to be stronger than average therein, while the main component over western and central Europe is primarily southerly – it is not that obvious this will lead to an increase in wind supply. All in all, the outlook seems to indicate a persistence in weak demand, while supply (renewables) is expected to remain close to the average of the period.
  • How does the above translate in energy pricing? To help clarify the picture, we projected the relative weight of the four weather regimes for power production during the past 3 months, as well as the forecast for April.
  • The “Solar”+”Low” regimes are set to slightly climb in April – this would mean, from a gas perspective, an increased request to burn the conventional source in order to meet demand. The latter is however forecasted to remain weak, in line with the seasonal cycle. As a result, April gas prices will (to some extent) depend on the observed balance between these two factors.

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