In the first few days of November, the NBP 2016-2017 spread has flipped into backwardation for the first time. Over the previous four months, that spread traded in contango around -0.6 p/therm. That backwardation suggests gas market participants are getting increasingly comfortable with the narrative of LNG oversupply. In particular this is evidence participants are starting to sell (hedge or spec) gas into the 2017 European hub contracts. With Henry Hub prices having fallen as well, the risk/reward of either taking an outright short on European gas or going long the Henry Hub–NBP spread is increasingly attractive.
The sudden turn to milder weather in November (after a colder October) has led us to revise our demand outlook to be 13 bcm higher y/y over winter 15–16, down by 3 bcm on our previous forecast. For these two quarters, we do not expect additional gas demand from the power sector, except in the UK, where the power sector will add 1.1 bcm y/y.
Our winter European supply outlook has also moderated from last month. Better performance from the UKCS will conservatively add 1 bcm y/y. But we are cautious on Norwegian gains, now seeing a 0.5 bcm y/y increase due to production likely to face some headwinds in the shape of lower prices. Dutch production will continue to be hampered by the Groningen cap, which should remove another 4.5 bcm y/y—with 3 bcm of that lost in Q4 15.
European LNG imports will not accelerate in Q4 15 as global LNG market dynamics mean volumes available to Europe could be around the same as last year. We still think LNG imports will be within 1 Mt on either side of last year’s level, but now we expect modest y/y increases as our base case. We predict LNG imports will begin to accelerate in Q1 16, rising y/y by 2.6 bcm.
Russian gas exports are likely to increase by less than previously assumed, but still rise by 13.5 bcm compared to last year if needed, leaving the call on storage broadly flat y/y. Ukraine is likely to continue to require gas supplies from Europe to get through a colder winter. Reverse flows could total 4 bcm through the coming winter, and we still expect Ukraine to also take a similar volume of Russian gas over the period. There is some evidence the y/y growth levels of Russian gas are starting to ease in November, although we still think most customers will try and get through as much of their annual take or pay limits over these two quarters. The spread between contract gas and hub could be bigger by the summer.
For 2016, we have made modest adjustments to our balances. We still expect forecast European LNG imports in 2016 will rise by 31 bcm y/y, and this supports higher end user demand of almost 24 bcm, 7 bcm higher than our previous forecasts. Over 2016, we see Russian imports falling by around 5 bcm, with y/y reductions in the last three quarters.
Our 2017 forecasts are also showing more demand, with the European market needing to absorb another 46 bcm of additional LNG supply. Again, it will do so through an expansion of demand, up by 34 bcm, combined with a 5 bcm reduction in Russian and other supply.
We maintain our price forecast for NBP prices to average 35.8 p/therm in 2016 and 29.5 p/therm in 2017.