NBP:moderate prices with a substantial upward correction
November 13 marked a break in the NBP’s ten-month downward trend. After hitting a low of €15.6/MWh ($4.9/MBtu), it climbed to €18.4/MWh ($5.7/MBtu), an increase of18%.The geopolitical context weighed on prices as tensions developed between Russia and two of its neighbors: Turkey (the summoning of the Russian ambassador on November 20 and the military incident of November 24) and Ukraine (deliveries were halted on November 24). But the pressure remains moderate, with the NBP price remaining below the threshold at which gas is competitive in the electricity production sector (in the vicinity of €20/MWh or $6.3/MBtu).
Based on case studies of four countries (UAE, Russia, Argentina and Pakistan), this new report by CEDIGAZ analyses the influence of subsidies on gas supply and demand dynamics.
EXECUTIVE SUMMARY
Gas price subsidies have a significant effect on the gas consumption. Simply put they embody the inexorable link between the price of a good and its demand. By artificially lowering the price of gas, it can become more competitive as a fuel, potentially even crowding out other fuels or technologies, as well as encouraging excessive consumption that would not have occurred in the absence of subsidies. The extent to which either of these situations are the case is dependent on the subsidies of a given country with two particular factors; price/level of discount and how much of the population it is available to. The cheaper the gas the more widespread and heavy its use (or the use of a byproduct of gas such as electricity, heat or water) will be. Additionally if subsidies are extended to larger parts of the population then not only does that increase the amount of users whose consumption may be wasteful but it also extends cheaper gas to richer households who are typically higher consumption users and therefore capable of wasting more. It therefore follows that any countries wishing to reduce or cut their subsidies will likely see their gas demand fall.
NBP: Weather conditions and coal are weighing on prices
Winter is near, but the NBP is not going up. On the contrary, it is continuing a steady decline that began back in March 2015, when it stood at €22.3/MWh ($7.1/MBtu). It remained in the neighborhood of €18.4/MWh ($6.1/MBtu) in October and averaged €17.3/MWh ($5.6/MBtu) in early November. These prices are respectively 15% and 27% lower than the previous year. Very mild weather is one reason why prices are so low.
The trend in the coal price has also played a key role. It stands at €49/t ($53/t) for November, down 18% in one year. This is on the same order of magnitude as the price reported in 2009. Back then, the NBP price was about €10/MWh ($4/MBtu) and had even sunk as far as €7.7/MWh ($3.3/MBtu) in September. If the coal price remains at its current level, should the NBP be expected to fall that low? The business environment is different, especially in the United Kingdom, where a carbon tax (Carbon Price Support) of €25/MWh (£18/t) helps support the NBP price by making natural gas more competitive with coal. However, on the Continent, the CO2 price is €8/t and the equilibrium price compared with coal is lower, estimated at only €12/MWh($4/MBtu). This may give rise to downward pressure, especially if the winter is mild, hence to a low inventory draw. This being said, the markets are not anticipating such a pronounced downtrend, but prices of €18.5/MWh for winter 2016 and €17/MWh for next summer.
Indexed European price: the trend is down
The indicative European price (LT77%) stood at €19.5/MWh($6.4/MBtu) in October,down by 3.6%for the month and 20% for the year. The current trends shown by the NBP (below €18/MWh) and the Brent ($52/b) would yield LT prices of between €17.5and19/MWh ($5.5-6/MBtu) for next year.
The U.S. market (Henry Hub):below $2/MBtu
The Henry Hub price averaged $2.3/MBtu in October, down 11% in one month. It dropped below the $2 mark ($1.92/MBtu) at the end of the month and, in early November, has been hovering around $2/MBtu. This level, exceptionally low, has only been reached twice in the last ten years: on September 3, 2009 ($2.09/MBtu) and April 18, 2012 ($1.89/MBtu). Such low points have usually been followed by fairly sharp rises, which explains why the annual averages are higher ($2.8 to 4.6/MBtu since 2010). The markets are expecting a similar scenario, with prices rising to about $3/MBtu at year-end 2016, which would yield an average price for 2016 of only $2.7/MBtu. Of course, these trends will be influenced by how harsh this winter will be.
November 13 marked a break in the NBP’s ten-month downward trend. After hitting a low of €15.6/MWh ($4.9/MBtu), it climbed to €18.4/MWh ($5.7/MBtu), an increase of18%.The geopolitical context weighed on prices as tensions developed between Russia and two of its neighbors: Turkey (the summoning of the Russian ambassador on November 20 and the military incident of November 24) and Ukraine (deliveries were halted on November 24). But the pressure remains moderate, with the NBP price remaining below the threshold at which gas is competitive in the electricity production sector (in the vicinity of €20/MWh or $6.3/MBtu).
