Energy Monitor – Gas price fluctuations

by: Hans van Cleef

  • European gas prices trading higher due to demand and supply factors
  • Higher Chinese demand triggers spectacular rise of LNG prices
  • Carbon emission rights’ prices gain possibly due to action by authorities
211217-Energy-Monitor-Dec-1.pdf (245 KB)
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Gas prices have rallied due to supply and demand factors

European gas prices have showed quite some volatility in recent weeks. Cold weather in the eurozone has led to a rise in gas demand. On top of that, an explosion at the Baumbarten, Austria gas pipeline infrastructure, triggered a temporary jump in UK gas prices. This pipeline is an important connection for Russian gas exports to (north west) Europe. Nevertheless, there are alternative routes to bring gas from Russia to Europe. The Baumgarten gas disruption came on top of the outage at the Norwegian Troll field and caused worries about European – mainly UK – gas supply. As a result, Natural Balancing Point (NBP) gas prices jumped higher. In addition, Dutch gas exports to the UK increased significantly until the problem was solved. Despite this, Dutch Title Transfer Facility (TTF) gas prices were hardly affected.

LNG prices nearly doubled due to higher Chinese demand

Besides the price rallies of pipeline gas in Europe,  Liquefied Natural Gas (LNG) prices have also risen significant  in recent months. The Asian LNG price has gained to levels above USD 10/mmBtu. This is twice the price traded in June. An important reason for this impressive price rally is the strong rise in Asian demand, especially from China. Chinese authorities try to fight air pollution and for the energy sector LNG is the cleaner solution. With a recent 40% improvement of the air quality this policy seems successful. This policy, however, also coincides with a positive effect on LNG prices. This upward pressure is the result of the limited availability of LNG on the spot market. Chinese LNG consumption gained nearly 19% in 2017. This rise in demand was partly met by an increase of local production (+10.5% to 133.8 billion cubic meter (bcm)). The Chinese gas imports increased with almost 29% to 81.7 bcm.

Normally, gas prices tend to ease again after the strong seasonal demand starts to decline. This time it is uncertain whether LNG prices will drop again in Q1 now the additional demand from China/Asia seems to be more structural. At the same time, the availability of LNG for other parts of the global gas market has declined. Although LNG exports from the US will increase in the coming years, it is still unclear whether it will result in a convergence between prices of gas in Europe, Asia and the US . LNG transportation and regasification costs are high. This means that pipeline transported gas remains cheaper in most cases. Therefore LNG will be mainly used to soften short term shortage, due to fast changing weather circumstances. As a result of the uncertain and volatile developments of demand, LNG will be vulnerable for large price swings as well.

Henry hub gas price too low?

Unlike our expectations, US Henry Hub gas prices remained under pressure because of higher supply. While in other parts of the world higher seasonal demand has led to higher gas prices, Henry Hub prices have declined in recent weeks. The price have dropped from USD 3.18/mmBtu at the end of November to USD 2.61/mmBtu on 15 December (currently trading at 2.65/mmBtu). EIA data showed that US production continued to increase. The number of drilling rigs for gas production rose from 132 in September 2016 to 183 mid-December. At the end of July, even 192 drilling rigs were in business. Market speculation also added pressure to the Henry Hub gas price. Since June, long positions (speculation on further price appreciation) owned by fund managers declined while the number of short positions (speculation on price declines) increased. In our view, Henry Hub prices have declined too much. Therefore, we expect an upward correction towards USD 3/mmBtu or even higher.

Will ETS carbon prices finally gain?

Recently the EU Environment Ministers announced to intervene in Emission Trade Scheme program to fight against oversupply. In the coming years, the EU will buy 25% of the oversupply of carbon rights each year. The Ministers expect the supply/demand balance to find an equilibrium in three or four years. This should lead to higher prices for carbon emission rights in Europe. Market expectations were that these kind of measures would lead to the creation of a less business- and/or industry friendly environment in which a part of the European industry would move to other countries where higher carbon emission prices are lower or do not exist. However, also in other countries and regions governments try to take action to lower their carbon footprint by adding price policies for carbon emissions.

China also announced the introduction of an ETS similar program in order to fight carbon emission by higher prices. Initially this will only focus on the energy sector, but in a later stage (>2020) other sectors will follow. In addition, a coalition of North- and South American countries and states agreed to strive for higher carbon prices. This agreement involves Peru, Chili, Colombia, Canada, Mexico and the US states Washington and California. As a result, the risk of industries moving to other regions has declined.