Energy Monitor – Gas prices already in autumn mode

by: Hans van Cleef

  • Increasing gap between US and European/Asian gas prices
  • Uncertainty over OPEC production cut compliance remains
  • Oil prices rally due to a drop in US inventories
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US Henry Hub fell to lowest level in five months

Due to colder than normal weather in the east and centre of the United States, gas demand for cooling declined. As a result, US Henry Hub natural gas prices recently declined to the lowest level in five months. According to the Energy Information Administration (EIA), the US gas inventories rose above the five-year averages. Since the overall market sentiment is very negative, only a small change in the weather outlook may trigger a strong price rally.

At the same time, gas prices in Europe and Asia continue to rise. While colder than normal weather in the US leads to lower demand for gas, colder than normal weather conditions in (northwest) Europe trigger greater demand (for heating). Furthermore, a spillover of the positive sentiment for oil and coal prices also provides support for gas prices. Last week, the ARA (Amsterdam, Rotterdam, Antwerp) coal price with delivery in 2018 rose to the highest level since September 2014. The coal price is partially driven by oil prices due to the link with the production and transportation of coal. Meanwhile, production disruptions in China are also triggering some nervousness concerning the supply of coal. This, in turn, sparks a degree of fear of possible shortages. Oil prices increased mainly based on speculation concerning the OPEC production cut agreement and US crude production (see also the next chapter). Finally, the sentiment on energy-related commodities often moves in tandem with oil prices.

The wider spread between US and European/Asian gas prices makes the export of US LNG more interesting. The bigger price difference mean that LNG – including the costs of transportation – becomes more competitive with imported gas from, for instance, Russia and Norway. For the European industry, a higher domestic gas price creates a disadvantage compared to American competitors. Alternative gas sources offer a better negotiation position as soon as new gas import contracts need to be concluded.

OPEC/non-OPEC meeting did not result in a higher oil price

For many investors, the Joint Technical Committee (JTC) meeting between several OPEC- and non-OEPC oil producing countries did not lead to a satisfactory result for many investors. In recent months, several countries became less compliant with the agreement to cut oil production. On top of that, oil production in OPEC member countries Libya and Nigeria (not part of the production cut agreement) increased. As a result, the total OPEC production topped the agreed production ceiling and reached the highest level in 2017. This raised worries about whether the market would be able to find a balance between the supply and demand of oil.

In recent years, high oil prices led to a significant increase in global oil production, resulting in a massive oversupply. To give some support to the low oil prices, the global oversupply should disappear. This will partly be triggered by a continuous rise in global oil demand. The agreement to temporarily (at least until the first quarter of 2018) lower OPEC oil production illustrates that these oil producing countries are trying to convince the market that oil prices are currently still too low.

At the same time, gas prices in Europe and Asia continue to rise. While colder than normal weather in the US leads to lower demand for gas, colder than normal weather conditions in (northwest) Europe trigger greater demand (for heating). Furthermore, a spillover of the positive sentiment for oil and coal prices also provides support for gas prices. Last week, the ARA (Amsterdam, Rotterdam, Antwerp) coal price with delivery in 2018 rose to the highest level since September 2014. The coal price is partially driven by oil prices due to the link with the production and transportation of coal. Meanwhile, production disruptions in China are also triggering some nervousness concerning the supply of coal. This, in turn, sparks a degree of fear of possible shortages. Oil prices increased mainly based on speculation concerning the OPEC production cut agreement and US crude production (see also the next chapter). Finally, the sentiment on energy-related commodities often moves in tandem with oil prices.

The wider spread between US and European/Asian gas prices makes the export of US LNG more interesting. The bigger price difference mean that LNG – including the costs of transportation – becomes more competitive with imported gas from, for instance, Russia and Norway. For the European industry, a higher domestic gas price creates a disadvantage compared to American competitors. Alternative gas sources offer a better negotiation position as soon as new gas import contracts need to be concluded.

OPEC/non-OPEC meeting did not result in a higher oil price

For many investors, the Joint Technical Committee (JTC) meeting between several OPEC- and non-OEPC oil producing countries did not lead to a satisfactory result for many investors. In recent months, several countries became less compliant with the agreement to cut oil production. On top of that, oil production in OPEC member countries Libya and Nigeria (not part of the production cut agreement) increased. As a result, the total OPEC production topped the agreed production ceiling and reached the highest level in 2017. This raised worries about whether the market would be able to find a balance between the supply and demand of oil.

In recent years, high oil prices led to a significant increase in global oil production, resulting in a massive oversupply. To give some support to the low oil prices, the global oversupply should disappear. This will partly be triggered by a continuous rise in global oil demand. The agreement to temporarily (at least until the first quarter of 2018) lower OPEC oil production illustrates that these oil producing countries are trying to convince the market that oil prices are currently still too low.