NBP: Oil, coal and the weather weigh on the price
The NBP rose to €18.5/MWh ($5.7/MBtu) at end November, but could not withstand various downward pressures, including that of mild December temperatures. The 9.2°C average reported by the “Met Office” in the U.K. broke the 1934 record of 6.9°C. As a result, the level of demand was relatively low, about 200 mcmd compared to 250 mcmd under average weather conditions. In reaction, the December NBP price slipped to €16/MWh ($5.1/MBtu), down 7% in one month. The first January quotations are in the vicinity of €15/MWh ($4.9/MBtu), equivalent to the prices reported in July 2014.
The weather conditions are not the only factor influencing prices. The December decreases in the price of coal (-11% in €/t) and the Brent ($38/b, -14%) are also responsible for the NBP’s downtrend. The sharp readjustment in futures quotations evidences this double whammy. Prices stand at €14.3/MWh ($4.5/MBtu) for summer 2016 and €16.4/MWh ($5.1/MBtu) for winter 2016. This is in alignment with the estimated prices of long-term contracts indexed on an oil price of $40/b. The latter corresponds to the average Brent price estimated in mid-December for 2016 by the futures markets.
Future movements will depend on how harsh or mild the current winter turns out to be and on the evolution of the oil price.
Indexed European prices: still falling
The indicative European price (LT 77%) averaged €17.2/MWh ($5.5/MBtu) in December, down by 6.7% in a month and by 32% in a year. The LT price could slide further, to €14.1/MWh ($4.5/MBtu) next July if current trends persist: an NBP below €16/MWh for summer and an average Brent price of $40/b. Presently, the Brent prices are lower than this, hovering around $36/b since mid-December. The high level of stocks and the return of Iran are weighing on the market. On the other hand, the geopolitical risk has been left out of consideration, because it is not currently affecting the oil supply.
The U.S. market (Henry Hub): volatile
Like in the United Kingdom, record high temperatures in the U.S. in December were a drag on the Henry Hub price, which averaged $1.9/MBtu for the month, down 7% over November. The low of November 2001 was beaten and prices even dipped temporarily below $1.6/MBtu.
When the temperatures dropped starting in late December, the price underwent a sharp correction. The early January price, at nearly $2.4/MBtu, was 21% higher than the December one. This led to a readjustment of futures prices, boosting the estimated price forecast for 2016 to $2.5/MBtu. This is still very low, below the 2012 average ($2.8/MBtu). Looking back, if one wants to find an equivalent price in constant dollars, one has to go back to 1995.
By Guy Maisonnier – Senior Economist – IFPEN