Fundamentals

Published at 14:04 21 Jan 2016 by . Last edited 11:17 22 Aug 2019.

Gas demand across the main European markets was generally weak in December. Very mild winter weather in the UK, the Low Countries and France was the chief driver behind the reductions in end user demand over the month. Indeed, in the residential sectors, gas demand fell by 0.70 bcm (-26%) y/y in the Netherlands, by 0.35 bcm (-29%) in Belgium, and by 80 mcm (-22%) in France. In the UK, residential demand was down by 1.55 bcm (-24%) as the need for heating was near absent. In Iberia, demand was flat y/y, while in Italy demand increased as the weather was regionally colder.

Total LNG imports into Europe were down by around 0.36 bcm (-11%) y/y in December. Reductions in imports were seen across most countries, with the exception of the Netherlands and Italy. The big question for 2016 is when, and how much, incremental LNG supply will be available to Europe. With Sabine Pass exports now delayed until March, we believe LNG imports this quarter could be modest, and that most of the incremental supply will arrive over the rest of the year once US cargoes are hitting the water.

Turning to other sources of supply, Dutch domestic production continues to sink as a result of the Groningen cap, down y/y by another 2.1 bcm (-29%) in December. Over all of 2015, Dutch gas production is down by 17 bcm (-24%) y/y. In December, the Government supported a November court ruling that now caps the fields output at 27 bcm for 2016, the impact on y/y comparisons will mostly fall in the first half of the year and we expect Q1 16 production to be lower by 15%.

Helping to make up for reduced Dutch output, Norwegian supplies were strong in 2015, although they have shown some signs of slowing down recently as falling prices provide little incentive to continue raising production. Russian gas supplies into Europe were also very strong over Q4 15. However, recent declines in European hub prices have opened a wider gap with Russian oil-indexed prices. Given the recent sell-off in oil, buyers could well reduce their takes of Russian gas in the current quarter, so that they can take advantage of the impact of even lower contracted prices later in the year.

In terms of storage, European hubs withdrew around 6.7 bcm of gas from storage over December, a large 5.6 bcm less than last year. The largest withdrawals were seen at the Baumgarten hub (2.1 bcm) and in Italy (1.8 bcm)—regions where cold weather materialised. In contrast, the NBP and TTF recorded small withdrawals (5 mcm and 0.89 bcm, respectively) as mild weather prevailed.

Weather forecasts from the IRI show generally warmer than average temperatures persisting over Q1 16. We continue to expect the rest of the winter will be moderately colder y/y, but warmer than average. We forecast that total European gas demand will be up by 3 bcm y/y in Q1 16.

2015 was a tough year for prices at the European hubs. Average NBP prices fell from 54 p/therm in December 2014 to 34 p/therm in December 2015 – a 36% reduction. Given the recent reduction seen in prices in the related fuels markets, we have adjusted all of our quarterly prices for this year downwards, with average NBP prices down to 29.4 p/therm from our previous forecast of 35.8 p/therm.

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