The European market is still navigating a winter where it is teetering between being comfortably supplied and oversupplied. The mild weather experienced in Q4 15 has already biased the market to oversupplied, dropping prices swiftly and heavily. Q4 15 HDDs were down by around 30% across Europe, and this pushed demand lower than even the mild Q4 14.
This helped to shrink the y/y shortfall in storage to just over 3 bcm, down from over 9 bcm at the start of the winter, helping to further ease the supply outlook for Europe. The supply side has stayed robust but is giving some signs of stabilising.
Russian gas was strong for all of Q4 15, but the step down in hub prices over the last six weeks has opened up a gap with oil-indexed prices. Further reductions in Brent, seen in the last few weeks, hold out the possibility that similar behaviour to last year—in relation to Russian gas—might now be seen in 2016. That is, we could well begin to see Russian gas buyers dropping volumes back down in the current quarter, so that they can take advantage of the impact of even lower contracted prices later in the year.
Norwegian supply growth is starting to slow relative to 2015, while Dutch gas output just keeps on dropping. LNG has been mixed, but SO data for December indicate imports of LNG into western Europe were down by 0.36 bcm y/y (-11%)—only the second month in 2015 to record a y/y drop. We did see a modest tightening of the LNG market coming at the end of the year, but it masks the fact that over 2015, western Europe took around 8 bcm (25%) more LNG y/y.
Over Q1 16, the return of LNG could again be modest, as a number of the LNG trains expected to start up in Q1 16 have seen some delay—with the latest being Sabine Pass in the US, which uncovered a wiring fault during the loading of its commissioning cargo. This now means that US gas that was likely to come to Europe in Q1 16 will be delayed, and increments will be even smaller. But, most of these trains should be online by the end of the quarter, and the rest of 2016 will increasingly be about additional LNG volumes arriving in Europe.
Given the expected influx of LNG in the next two years, it is essential we see demand side response. We now expect to see more of that elusive demand response to lower prices emerge. In the UK, the additional carbon tax means that most of the country’s CCGT plants should be in merit against coal-fired generation. On the continent, the newest, most efficient CCGT should be pushing out some of the older coal plants given the current price relativities. More significant fuel switch will only be found at lower gas prices.
While the underlying supply-demand fundamentals have not shifted by all that much, the impact of the reductions in oil, coal, and carbon prices means that the fuel switching levels have dropped even lower, and the future prices associated with Russian indexed gas have also fallen.
We have adjusted downwards all of our quarterly prices for 2016 and 2017, with average NBP prices for 2016 down to 29.4 p/therm from our previous forecast of 35.8 p/therm. For 2017, our forecasts have fallen to 26.4 p/therm from 29.5 p/therm. 2016 is now forecast to see a larger y/y price reduction, due largely to the step down seen in prices in the related fuels markets.