On the brink

Published at 14:24 14 Dec 2015 by . Last edited 09:30 20 Apr 2016.

The European gas market is still teetering between being comfortably supplied and waiting to be heavily oversupplied. The trends of 2015 continue to be driven by some basic dynamics. Dutch supply keeps dropping sharply and over the year is set to be down by almost 20 bcm y/y. Norwegian supply has been strong in reply, adding 8–10 bcm, while Russian gas has overcome a soft H1 15 and will probably close the year 5 bcm y/y higher.

The European market has also seen the start of the return of LNG, with European imports up by 8 bcm y/y. The combination has meant Europe has seemed fairly well supplied, but even then, the region has needed a net reduction in storage levels of 9 bcm compared to last year.

For Q1 16, we expect the weather will be colder y/y, although only moderately so. We forecast this will lead to a 3.4 bcm y/y increase in demand. There will be no additional gas demand from the power sector, except in the UK, where a combination of the higher carbon price levy and a lower impact of embedded solar capacity in the winter will add around 1.0 bcm to the country’s power sector gas demand.

The big question for 2016 is now about when that return of LNG to Europe will accelerate, and how much comes into the market. Given the timing of trains and how we expect them to ramp up, we see LNG supply available for Europe rising by 23 bcm y/y—a reduction on our previous estimates, but still enough to alter EU gas market dynamics.

While LNG supplies should start to post y/y increases from Q1 16 onwards, the increases in H1 16 remain relatively small compared to our expectations for subsequent quarters. We see European LNG imports as higher y/y by 2.4 bcm in Q1 16, although there is more upside than downside to those, given the influence of El Nino on Northeast Asian weather patterns.

For 2016, there is a question of how much supply is already being sold into the curve by the Qataris. Qatari producers, which includes Rasgas partner ExxonMobil, a company that notoriously does not hedge, have plenty of flexibility to swing volumes from the Pacific to Atlantic basins. They also have plenty of European regas capacity, covering South Hook, Gate and others, and we have already seen some swing of Qatari gas back into the European markets. Given how the Qataris put gas into the European market, with limited use of hedges, we expect most of this will be offered into the market as spot. The implication is more potential downside for prices.

From a capacity standpoint, the acceleration of Norwegian production seen this year could continue next year. Gassco has announced a lighter maintenance schedule for 2016 compared to 2015, and two new giant compressors started up on the Troll A platform in November. Against this, there is the delayed timetable for the Aasta Hansteen and Mariner fields, and questions about how NCS producers will respond to lower gas prices in the short-term. We are conservative on NCS production and expect production to stay around the 117 bcm level in 2016 and in 2017—with producers maintaining but not expanding production.

We maintain our price forecasts for NBP prices to average 36 p/therm in 2016 and 30 p/therm in 2017.

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