Starting short

Published at 08:00 15 Oct 2013 by . Last edited 09:29 20 Apr 2016.

September in the European gas market saw hub prices stay stuck in their 5 p/therm trading band around the 65 p/therm level - a pattern that has characterised all of the Q3 13 summer period. While the weather was variable, with first colder and then warmer than normal temperatures, we did not see the start of the heating season. End user demand continued to be weak with residential, commercial and industrial demand down y/y in most markets. On the continent, power sector gas demand saw no improvements as gas stayed resolutely out of the money against coal. Only in the UK did we see some notable increases in power sector demand for gas, the first signs that the closure of coal plants under the LCPD is providing support for gas-fired plants to increase their operating hours.

The one constant across the markets was the need to re-inject gas into storage facilities. September did see more injection, with Q3 13 as a whole seeing around 8 bcm more gas being injected y/y. Despite the heavy injection pattern, come mid-October, European storage levels were still some 4.4 bcm lower y/y. While injections will continue for another couple of weeks, we expect the northern European markets to start the winter some 3 bcm short y/y.

The supply story has been focused on problems at Norway's Troll field and how these are now going to run through this winter and next summer. The question for the winter is if Troll supply is likely to be down around 1 bcm/m, how much other flexibility is there in the Norwegian Continental Shelf? While there is unlikely to be enough to make up all of that loss, we estimate that there is sufficient flexibility across other fields to make up around 0.7 bcm/m – although it will take some pretty good performance to squeeze all of that swing out of the other fields.

Aside from Norway, Dutch output has been strong all year and we have seen some large increases from Russian production over the last three months. If this is an indication that the Bovanekovo field has moved past any teething problems, there could well be more Russian gas around this winter – which will be happy to come to market under existing long-term contracts if needed. LNG remains scarce and is not going to come back in 2014, but we could see some more volumes in 2015. The expectation of this is already driving backwardation in the curve.

With underlying demand generally modest (some upside in the UK only), weather remains the wild card for the market. The seasonal forecasts point to a generally warmer winter than last year, although November is forecast to be cold. A really cold November will mean game on for prices, which could add a good 5 p/therm or so. After that, we expect a warmer Q1 14 than last year and so would expect price levels to ease if storage withdrawals slow and inventory levels later in the year begin to look more normal.

The outlook for 2014 is broadly bearish, so we are holding onto our NBP price outlook for winter gas prices (Q4 13 and Q1 14) to average 69.5 p/therm (almost no change y/y), while we expect 2014 prices to average 65.5 p/therm (down 4% y/y). A prolonged cold spell in November brings the potential for upside against our forecasts in the contracts further down the curve, as the market will then all be about pricing in weather risk.

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