The European winter has proven to be no barrier to prices falling, with average NBP D+1 falling some by 6% m/m and 31% y/y, clocking in at a low 32.1 p/therm. The mild weather experienced in Q4 15 largely continued in January with HDDs down by 11% y/y, keeping residential and commercial demand modest.
Continued bearish developments in related fuel markets have added to the weak demand woes. Over January, M+1 Brent fell by 7% while M+1 ARA coal declined by 6% and carbon fell by a whopping 45% over the month. As a result of these further bearish movements in related fuels, gas prices now need to fall even further to provoke some demand side response.
The much lower coal and carbon prices mean the window for interaction with US gas is now likely to be even tighter, with most fuel switching occurring at prices close to the levels where the arbitrage window between Henry Hub and NBP prices start to close. All of this is before US gas exports have even materialised.
Northwest European supply has stayed relatively buoyant. SO data indicate a strong start to the year for Norway, with production up by more than 1 bcm (10%) y/y. Adding to a strong start to the NCS, Total just started up its long awaited Laggan-Tormore fields in the West of Shetlands part of the UKCS—which suggests another y/y increase for UK production.
While the above factors are positive for supply, they could be somewhat offset by further reductions in Dutch production, with January seeing reductions outstripping what was strictly required by the lower Groningen cap.
We have been expecting that over Q1 16, the return of LNG may again be modest, as a number of the LNG trains expected to start up in Q1 16 have seen delays. The trio of Sabine Pass (US), Gorgon (Australia), and Angola all being pushed forward to March means that there will be less incremental LNG available to Europe. We expect less than 1 bcm in Q1 16 (particularly given indications of y/y reductions in January). That will change, and we expect Europe should receive around 14 bcm more LNG in total over 2016, before this swells to a potential 55 bcm more LNG y/y in 2017.
Given the expected influx of LNG in the next two years, the demand side response becomes all important. We now expect to see more of that elusive demand response to lower prices emerge. More significant fuel switching will only occur at lower gas prices—which suggests prices will need to fall further from current levels.
We have adjusted all of our quarterly prices for 2016 and 2017. For 2016, average NBP prices are down to 26.8 p/therm, from our previous forecast of 29.4 p/therm. For 2017, our forecasts have fallen to 24.5 p/therm from 26.4 p/therm—although this does mask some shifts in quarterly price averages, with reductions to winter quarters and increases to summer quarters. The price adjustments align our price views on Europe much closer to our views on Henry Hub.
Importantly, the summer 2017 prices see the arbitrage window between Henry Hub and the NBP shut, as European prices increasingly look to stimulate demand to absorb greater Middle Eastern LNG volumes while the US hub gets bid up to meet expanding North American demand.