European gas prices on the slide
A gas glut is hitting prices, and the continent’s buyers are benefiting
European gas prices have been struggling for the past year – and so far nothing suggests 2016 will be any better. Weak crude prices, lacklustre demand and rising supply are all to blame.
A mild winter also helped push UK natural gas prices to six-year lows. Indeed, at the National Balancing Point (NBP), they’ve fallen by almost 30% in the past three and a half months. Front-month NBP futures were at just £0.27 per therm (equivalent to $4 per 1,000 cubic feet) in mid-March, down from almost £0.38/therm at the beginning of December.
Supplies from the UK Continental Shelf and Russia, together with more liquefied natural gas imports from Qatar have weighed on the market. European gas prices more broadly should keep falling throughout 2016, as import volumes rise further from the second quarter on.
NBP prices could average £0.25/therm in the second and third quarters, down from around £0.45/therm and £0.41/therm in the same periods last year, says Energy Aspects, a consultancy.
A slight fall in German demand and an increase in imports will also soften German gas prices in the second quarter, to €11.20 per megawatt hour (or about $3.80/’000 cf). That’s down from almost €13.00/MWh in the first quarter of this year and around half the price of Q2 2015.
Consumption is struggling. For the first quarter of the year, Energy Aspects expects it to be 3bn cubic metres (cm) lower than a year earlier, at 151bn cm. Low prices should help, allowing demand to pick up through the rest of the year.
But supply will more than compensate, reaching 111bn cm in the second quarter, or 4bn cm more than a year earlier. EU imports from Russia and Central Asia alone are expected to be 9bn cm higher, year on year, between April and June, reaching 38bn cm. That follows a 5bn-cm year-on-year rise from those exporters in Q1 2016.
But crude prices are also holding sway over the natural gas market. Oil-linked supply contracts still dominate Europe’s gas supply, especially from Russia and North Africa. Brent’s weakness will cap gas term-contract prices as well.
Likewise, oil prices can also affect European spot gas prices indirectly, through the Asian LNG market. A 70% fall in northeast Asian LNG prices since 2014 has prompted countries like Qatar to divert more cargoes to Europe.
At the beginning of January, spot LNG could be bought for about $6.30/’000 cf in east Asia, according to Argus Media, a pricing agency – less than a third of their price from two years earlier.
As new LNG projects come on line in Australia and the US this year, a growing supply glut should put more pressure on the European market. It may also prompt more aggressive marketing from Gazprom to retain its customer base. The coming 12 months will be a better time to buy natural gas in Europe than to sell it.