Fundamentals

Published at 12:02 11 Feb 2016 by . Last edited 09:30 20 Apr 2016.

January was another month marked by weak gas demand in Europe. Unseasonably mild weather was once again the culprit. Indeed, in the residential sectors, gas demand fell by 20 mcm (-1%) y/y in the Netherlands, by 0.16 bcm (-12%) in Belgium, and by 0.38 bcm (-9%) in France. In the UK, residential demand was down by 0.55 bcm (-8%) as there was little need for heating. In Iberia, demand was down y/y, while in Italy demand increased on strong consumption in the power sector.

With the delay of the commissioning cargo from Sabine Pass until at least March, we expect incremental LNG imports into Europe to be modest this quarter (less than 1 bcm higher y/y). The most recent data indicate that total European LNG imports have started off the year weak, and were down by around 0.4 bcm (-12%) y/y in January. Reductions in imports were seen across most countries, with the exception of France, which took 0.56 bcm (44%) more y/y. We continue to believe most of the incremental supply will arrive over the rest of the year once US cargoes begin to cross the Atlantic.

Looking to other sources of supply, Total recently reported first gas production from its long awaited Laggan-Tormore fields in the remote West of Shetlands part of the UKCS. The start-up of this field suggests that UK production will be up y/y in 2016, and we are now forecasting a 0.5 bcm y/y increase in Q1 16. Norwegian production has also been strong, with data for the start of the year indicating production up by more than 1 bcm (10%) y/y.

The strong performance from the UKCS is continuing to help offset declining Dutch production from the Groningen field. Domestic Dutch production fell by another 2.3 bcm (-30%) to 5.4 bcm in January. We anticipate that Q1 16 will see fairly significant reductions in Dutch gas output, but expect the y/y changes will be much smaller in the subsequent quarters, as the Groningen cap was first reduced last February.

In terms of storage, the European hubs withdrew around 14.6 bcm of gas from storage over January, around 2.2 bcm less than last year. The largest withdrawals were seen at the Baumgarten hub (3.1 bcm) and in Italy (3.3 bcm)—the only regions that experienced colder than average temperatures. As of 1 February, Europe has around 1.6 bcm less gas in storage than at the same time last year (-3%).

Weather forecasts from the IRI continue to show generally warmer than average temperatures in Q1 16, and lasting into Q2 16. The consistently warm weather and lack of mean reversion in Europe has led us to revise our demand forecasts for Q1 16 to a 0.9 bcm reduction y/y.

2016 has started with very bearish sentiment across the commodities complex, and prices at the main European gas hubs were no exception. Over January, M+1 Brent fell by 7% while M+1 ARA coal declined by 6%, and carbon fell by a massive 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 when the LNG arrives.

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