As summer across Europe peaks, forward gas prices have continued to drift lower in the UK fuelled by falling oil prices and an expectation of increased supply in the coming months. Below are a few thoughts on price drivers.
Ahead of the National Grid’s winter outlook report it seems unlikely that we will be deluged with gas in Europe this winter. A much lower oil price will encourage the gas suppliers and super users to take as much gas direct from any remaining oil price related contract formula as they can rather than direct from the hubs. This gas does not exist in a vacuum, however, so expect hub prices to do little but reflect these moves. In the UK NBP gas has benefited from the rise of sterling. However, following Chinese devaluation and limited scope for inflation in the UK, it would seem that a 2015 rate rise is becoming increasingly unlikely, and sterling will retrace some of this strength.
The beleaguered Dutch gas field Groningen seems unlikely to win any political reprieves for higher output, so the fall-off in North Sea production looks set to continue through the winter of 2015-6. On alternative supply, it would seem a safe bet to assume that the increasing availability of LNG will offset much of the North Sea’s difficulties, particularly if Japan gains traction with nuclear power station restarts and Chinese growth continues to falter.
Storage. Despite some problems at the UK’s largest storage facility, it seems likely that we will go into the autumn with record levels of storage available. That said, the one thing that appears to be missing from commentary is the price level at which this gas has booked in. The gas prompt has been reluctant to pull back this summer relative to the fall in the winter season with prompt prices ranging from 50-40p/th. Many gas storage players will be looking at weighted average gas prices above 42p/th before financing, capacity, and access are priced in. As the first cold test of winter appears one thing is for sure: without an opportunity storage cycling, gas holders will be reluctant to actualise losses.
Oil. Without a doubt, oil is still the major influence in the pricing of gas futures. The threat of demand slowdowns in China, Chinese devaluation, dollar strength, and significant supply overhangs from OPEC continue to dog the market. Short-term technical traders suggest that the market in the US WTI grade could see levels drop back towards 2008/9 lows, certainly well below $40/bbl in the short term. Leading forecasts are less pessimistic, with many still seeing oil’s natural equilibrium somewhere between $5565/bbl for WTI. One thing the last 12 months have underlined, however, is that markets can be brutal when a market is undergoing a revaluation. Few, if any, forecast the collapse and likely as not as the producers pull back higher cost production and demand growth edges higher across the globe, few will see the turn again.
The winter of 2015 has already seen the cheapest gas prices in five years. From memory, few energy buyers ever got sacked buying into 5-year contract lows. The big move down is history and time is running short for fixed contracts with Q4-15 starts.
Written By- Jason Durden
