PIRA Energy Group reported that milestones have emerged in European gas supply. In North America, most gas prices had month-on-month gains in October along with Henry Hub, but not all. In Asia, Japan loads up on LNG contract volumes, limiting spot exposure.
Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
PIRA projects that peak U.K. gas production this winter will not reach levels that would even cover the low point for U.K. gas demand in the middle of the summer. Volume is an issue, but it is lower flexibility this winter that is even more significant for price. Meanwhile, the Russian production in October established the largest year-on-year gain since the post recession recovery in May 2012.
Most North American Gas Prices Post M/M Gains in October Along With Henry Hub, but Not All
The modest month-on-month gain in average daily Henry Hub prices helped lift nearly all regional prices in October relative to September levels, even in Appalachia. Only a few points failed to gain month-to-month, namely those in the Northeast such as Transco Z6 and Dawn in eastern Canada. The clear standout performer to the upside, however was AECO in western Canada, which soared from a low in late September to a high in October, cutting the basis discount from -44% to -14%.
Japan Loads Up on Contract Volumes, Limits Spot Exposure
Japan is heading into its winter peak under highly unusual circumstances; no nuclear power, combined with a general downtrend in LNG consumption, makes it a challenge to determine exactly how short – if at all – of spot LNG Japan will be this winter. Never mind reports that they are “well supplied,” such stories often appear at this time of the year, and besides, no one can say with any certainty what December weather will look like. Still, spot volumes are clearly being pushed out of Asia in favor of volumes from contracted suppliers within the region as well as in the Mideast.
Risks to Peak Supply this Winter Justify Lengthy Positions
The core reasons that winter spot prices are up strongly over the past two months are valid ones; if the weather becomes colder than normal, it is not entirely clear where the incremental supply will come from to balance the market at current prices. While the working gas storage situation has improved in October – Germany, Italy, the U.K., and Austria all set injection records for the month – it is by no means at a level that provides an adequate cushion for the entire winter. What the market faces is a wide variety of demand outcomes due to weather with a highly constrained number of supply options to balance.
LNG World News Staff, November 06, 2013