Last week, we reviewed the impact of tax changes to shale gas exploration. This can be seen as the second phase in reasons why gas prices will decline. In the short to medium term we can identify four major reasons why gas prices will soften.
The overall arching framework for these reasons is dictated by supply and demand fundamentals rather than sentimental.
Firstly, this is a glut of natural gas supply. “Global gas reserves are higher than they were 10 years ago despite a decade of production and increased demand”. There have been consistent and large scale global discoveries, namely in East Africa and the Eastern Mediterranean. Furthermore recovery rates from existing fields continue to rise in Russia, Iran, Iraq and Alaska due to technological advances.
Second, Liquefied Natural Gas (LNG) continues to “create further gas to gas competition and breaking the old contractual link between gas and oil prices”. The advancement in floating LNG production and liquidation facilities will continue to overshadow the traditional pipeline transportation method and regional sales.
Japan is now keen to switch back to nuclear. Prime Minister Abe’s government is confidently committed to restoring nuclear power as part of their “Recover Japan” programme. The rising cost of Asian spot LNG prices is no longer a sustainable option regarding budget balancing and restoring economic growth.
Lastly, constraints on demand in Europe where the strong drive to hit 2020 renewable targets will look to reduce demand from one side. On the other side, falling coal prices (down some 25 per cent so far this year) has lead the UK supply mix to utilise more coal instead of gas for power generation with the Dark Spread consistently over £20/MWh and Spark Spread yet to breach £5/MWh.
