The capricious gas market

by: Hans van Cleef

131108.Energy-Monitor-Nov.pdf ()

– Oil prices declined, but Brent is taking a slower path than WTI
– Oil prices to remain under pressure in 2014, while gas paints a mixed picture
– Dutch gas will not rise when the Netherlands become a net importer of gas


2014 oil outlook

We recently published our new Quarterly Commodity Outlook. This outlook provides, besides a three-month forward looking view, also a longer-term view on the oil and gas market. Although the fundamentals seem to be in place for lower oil prices in the coming years, the postponement of tapering by the Federal Reserve (Fed) kept oil prices trading within narrow ranges. We expect that the Fed will announce the start of tapering in March 2014. Although the market has already started to discount the effects of tapering, we believe that the actual announcement will result in higher yields and a stronger US dollar.


oilprice forecasts

As a result, oil prices could come under pressure, as oil would become less interesting from an investment perspective. On top of that, there are other factors that would add more pressure to oil prices in the coming years, starting in 2014. Although the tensions in the Middle East are still high, there are also signals that the situation may improve in the coming months. One of the most important issues that resulted in a rise of the risk premium is the nuclear programme of Iran. Newly-elected President Rouhani has indicated, however, that he wants to improve the ties with the West. Since then, the hope of a compromise between both sides has risen. An agreement on Iran’s nuclear programme could lead to partial lifting of the sanctions that prevent Iran to export a large part of its oil supply. But in our view, it is Iran that must put its money where its mouth is. That actually could have a double effect on the market. After all, not only the risk premium would decline, but also supply or supply capacity would rise with another two million barrels per day. That is, if Saudi Arabia and Israel also approve the progress booked by the West (read US). A rise of Iranian production would come on top of increased production in non-OPEC countries (mainly US and Canada), as well as Iraq and Libya. Up to a certain level, this rise in production gives Saudi Arabia room to lower its output, to the benefit of its reserve capacity. Demand, on the other hand, is expected to show a modest recovery, which should easily be balanced by the rise in production. As a result, we expect Brent oil prices to drop to an average of USD 95/barrel in 2014, and even lower in 2015. Finally, we expect WTI to trade at a USD5/barrel discount to Brent (for more details on WTI, please see our Quarterly Commodity Outlook).

table oilprices

Longer-term outlook on gas

In our recent update on US natural gas, we stated that the main drivers for the fourth quarter are rising seasonal demand and weather-related news possibly affecting production. Therefore, some near-term upside could show in the coming weeks. In 2014, we expect US demand to pick up on the back of economic recovery. Besides economic recovery, also the closure – or retirement – of older coal plants will lead to a rise in gas consumption. We expect rising demand to have a much bigger effect in the US than in emerging Asia and Europe. One of the reasons is that US Henry Hub natural gas prices are still extremely low from a historical perspective. This is clearly the result of the shale gas developments in the past few years, which led to a great oversupply. Besides that, many US (shale-) gas producers also need a higher gas price, as the current price does not cover the costs. Nevertheless, the reason that supplies are still expanding is so-called associated gas, a by-product of, for instance, oil production. If US gas prices continue to rise, obsolete gas production rigs become economically viable again and can be taken back into production. That, in turn, would increase the output and automatically add a cap to gas prices. We expect Henry Hub natural gas prices to be capped at approximately USD 5.00/mmBtu. Above this level, coal demand would start to increase again.

gasprices forecast

In Europe, the situation is completely different. If we look at the APX NL TTF prices for natural gas, prices appreciated strongly from early October 2009 (EUR 7.20/KWH) to levels above EUR 28/KWH (we even left out the spikes in 2012 and 2013 due to temporary seasonal heating demand). However, some changes within the rising trend can be seen. In fact, the pace of appreciation is easing since early 2011, but during the last few months, the rising lower trend line was broken. This pushed TTF prices more in a neutral – or sideways moving – trading range. We believe that in the coming years, European gas prices will even start to decline. The lower gas prices will be the result of improvements in energy efficiency (or lower demand), combined with the rise of alternative energy sources and (re-) negotiations of (expanding) long-term contracts with Russia. This should lead to a drop of at least 10% in European gas prices. However, there is a floor under gas prices too. Countries such as Norway strongly depend on long-term contracts, as these justify the large investments needed to continue, and even increase, gas production. Consequently, a switch to an almost fully market-controlled gas price as seen in the US, seems for Europe therefore not very likely. The price difference with the US is therefore set to decline, but not to disappear.