- Global trends
– Overall, the gas markets in Asia, Europe and the United States have been fairly volatile. In addition to the upcoming winter’s degree of severity, the oil price and economic context are also sources of uncertainty. Average prices for 2018 have been trending upwards, with the notable exception of those in the United States.
– The average price of gas imports to Japan continued to rise in the third quarter, mainly influenced by the uptrend in the oil price. During Q3, LNG spot prices approached long-term prices, indicating a tightening of supply due to increasing demand in Asia. According to market forecasts, this state of affairs should persist throughout the winter, followed by a perceptible price downturn starting in the spring of 2019.
– Since Q2 2018, the NBP price has been on an upward path. This trend is expected to continue throughout the winter then start a downswing in Q2 2019. Overall, it has been lower than the prices seen in Asia, a factor that does not favor LNG deliveries to the European market.
– It is thought that the Henry Hub price, up slightly at the end of Q3, will continue this uptrend over the next two quarters. The latter is not considered to be structural and, for 2019, the forward markets are anticipating a lower price due to the expected increase in production.
Fig.1 2017-2019 gas price, by quarter: United Kingdom, Japan and the United States ($/MBtu and €/MWh)
- A tighter supply in Q3 affected prices in Asia
In Q3, the Brent price reached a new high of $75.2/b, up by more than $20/b compared to Q3 2017. This was largely due to Venezuela’s decline in oil production due to worsening social and economic conditions and to the oil embargo on Iran, slated to take effect on November 4. Since 2017, the average price of LNG imports to Japan, a large proportion of which are long-term oil-indexed contracts, has risen steadily. In Q3 2018, it stood at $10.5/M Btu compared to nearly $10/MBtu in the previous quarter.
Fig. 2: LNG import price in Japan and Brent price
Spot prices were still under pressure – trending more or less on a par with average import prices, remaining within the $10-12/MBtu range since July – due to the sustained growth in Asian demand and the rise in oil-linked LNG contract prices.
Price trends: pressure this winter, downturn next spring
If the oil price remains at its current level of about $80/b, the average price of imports to Japan should stay in the $11.5-12/MBtu range. But many areas of uncertainty still persist as to how the oil price will evolve. The most recent Reuters survey forecasts an oil price of between $60 and 85/b in 2019. Assuming a price at the low end of this range, long-term oil-indexed prices could drop progressively to around $10/MBtu. If this happens and depending on the winter’s severity, spot prices could be subject to strong variations in the next few months.
As for spring and summer 2019, the market expects a strong downwards correction, with the price dropping below $10/MBtu in the second and third quarters. This trend indicates that no structural deficit is anticipated on the LNG market next year. However, the delays expected for certain LNG projects (in Australia and the United States) are likely to exert temporary pressure on prices.
LNG imports to North East Asia (first 9 months of 2018)
Net LNG imports to North East Asia increased by 12.7%, up from 170.9 bcm in 2017 to 192.7 bcm in 2018. The main reason was strong growth in China, whose imports reached 49 bcm (+15 bcm) of refrigerated natural gas in the first three quarters of 2018, followed by South Korea with 42 bcm (+6.5 bcm). Taiwan saw moderate growth of 3%, whereas net imports to Japan (84 bcm) remained stable compared to last year.
Fig. 3: North East Asia, quarterly LNG imports
In Japan, the marginal decrease in LNG imports (-0.2 bcm) in the first nine months of the year was partly due to restarting four nuclear reactors with a combined capacity of 4,720 MW. For the first half of 2018, total natural gas consumption fell by 0.14 bcm compared to the same period last year. According to the Institute of Energy Economics, Japan (IEEJ), this trend should continue. The IEEJ expects the share of nuclear power production in the Japanese energy mix to increase from 3% in 2017-2018 to 6% in 2018-2019, causing a slowdown in national demand for LNG.
In Taiwan, the plan is to phase out nuclear power by 2025. In line with government policy, the Chinshan 1 & 2 reactors (combined capacity: 1,272 MW) were shut down in October 2018. For this reason, LNG demand may be higher in the final quarter of 2018 than it was in Q4 2017.
- Prices in Europe: NBP under pressure and a tight market expected this winter
Higher gas prices in Europe
In Q3, the NBP price stood at $8.4/MBtu (€25/MWh), up sharply compared to Q2 ($7.3/MBtu) and exceeding last winter’s peak of $8.1/MBtu (Fig. 4). There were many factors involved, including
– The oil price had risen.
– It had been necessary to replenish stocks in Europe, substantially depleted due to strong growth in demand following a harsh winter. At the end of winter 2017-2018, inventory was down. At the approach of winter 2018-2019, its level was inferior to that of previous years: 905 TWh (85% filling level) versus 950 TWh (26%) at the same date in 2017 and 980 TWh (91%) in 2016 (Fig 5).
– Summer demand had boomed due to a heat wave in much of the Northern Hemisphere that forced some nuclear reactors to shut down (4 in France).
– The price of CO2 (€14.5/TCO2 in Q2 and €18.9/TCO2 in Q3) tended to encourage the consumption of natural gas instead of coal in electric power plants.
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Fig. 4: NBP price
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Fig. 5: Gas in storage
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Trends
The European markets are expecting higher prices in the next two quarters (€28-29/MWh and $9.4-9.8/MBtu). Like the Asian markets, they foresee a fairly significant downturn as of next spring (€23-25/MWh and $8.1-8.6/MBtu). These prices are markedly lower than oil-indexed contract prices, indicating an absence of structural pressures.
Impact on the electricity market
The increase in natural gas prices on the European market entailed higher costs for the electricity sector, especially in the United Kingdom, Germany and France. It is thought that the operating costs (energy + CO2 prices) for producing electricity at gas-fired power plants will keep rising during winter, exceeding €60/MWh in Europe and €70/MWh in the United Kingdom (Fig. 6). However, a net decrease in costs is expected starting in Q2 2019, in accordance with seasonal trends (Fig. 4).
The competitiveness of natural gas compared to coal will be very different on the European continent and in the United Kingdom, owing to the higher cost of CO2 on the British side. Despite the current increase in the price of CO2 ETS, gas will be less competitive than coal on the Continent, especially this winter. In the U.K., the carbon tax (£18/t) is carrying out its intended role of ensuring that gas remains globally competitive. However, the cost of electricity produced at gas-fired power plants (energy efficiency: 50%) in the U.K. this winter should equal (or temporarily exceed) that of coal-fired power plants (35%) (Fig. 6).
Fig. 6: NBP price and cost of European electricity (gas-fired and coal-fired power generation)
- U.S. gas price: under temporary pressure but globally stable
Slight uptrend since July
In Q3 2018, the Henry Hub (the U.S. reference price for natural gas) edged up steadily, rising from $2.8/MBtu in July to $3/MBtu in September. The average for Q3, remaining stable compared to Q2, stood at $2.9/MBtu.
Prices up this winter, stable next year
The forward markets are expecting an average of $3.2-3.3/MBtu for the next two quarters, an increase of nearly 10% over Q3. This increase is due to market conditions presenting a relatively low level of stocks at the start of winter. In November, inventory should be in the vicinity of 94 bcm (3270 bcf), lower than the level observed in recent years, i.e. close to 110 bcm (Fig. 8). This shortfall accounts for the pressure on the gas price, which will ultimately depend on how harsh the winter is and the degree of inventory draw-down.
The estimated average for the year 2018 is now $3/MBtu, up by a modest 1% over last year. For 2019, the markets are anticipating a lower price, which indicates that they see the current pressure as being temporary. This perception may be due to the strong increase in production, which will enable a large increase in net gas exports (Figs. 9 and 10). Net exports, which stood at 20 bcm in 2018, are forecast to reach 60 bcm next year.
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Fig. 7: Henry Hub price (United States)
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Fig. 8: Natural gas inventory (2009-2019)
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| Fig. 9: U.S. natural gas production and consumption (2014/2019)
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Fig. 10: U.S. natural gas trade
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U.S. LNG more competitive
The relatively low level of prices in the U.S. and their stagnation should help boost the competitiveness of U.S. LNG. On a full-cost basis (including the costs of liquefaction and shipping), U.S. LNG remains competitive compared to market prices in Europe and Asia (Figs. 11 and 12). Its competitiveness, observed since year-end 2017, has increased as a result of price hikes on these two import markets. The margin on deliveries to Asia is higher, making Asia preferable to Europe as a destination for exported U.S. gas.
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Fig. 11: U.S. LNG costs to Europe vs.NBP price
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Fig. 12: U.S. LNG costs to Asia vs. Japanese LNG spot price
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By Guy Maisonnier – Senior Economist – IFPEN
Constancio Silva – Senior Economist – Cedigaz
Amit Singh Rao – Junior Economist – Cedigaz
Cedigaz (International Center for Natural Gas Information) is an international association with members all over the world, created in 1961 by a group of international gas companies and IFP Energies nouvelles (IFPEN). Dedicated to natural gas information, CEDIGAZ collects and analyses worldwide economic information on natural gas, LNG and unconventional gas in an exhaustive and critical way.