Global gas prices today are not only low, but unprecedentedly low, with little to suggest any imminent upside.
Producers may be suffering, but large consumers of natural gas have an opportunity to benefit from current market dynamics if they are willing be proactive and take a careful look at their procurement.
How low can prices go?Such is the downward pressure on prices that some contracts have recently hit 16-year lows.
In January the front-month NBP price averaged just 28.76 p/th ($3.80/MMBtu), a 22% month-on-month decline and nearly half the level seen just a year earlier.
While prices in all of the main markets have been firmly on a downward trajectory as a result of oversupply, the JKM market has been particularly hard hit, most recently by yet more LNG demand destruction arising from the Coronavirus.
The $2.80/MMBtu to $2.90/MMBtu range in which JKM is currently trading represents a loss of two thirds of the $8.80/MMBtu it was achieving as recently as January 2019.
The pattern of falling prices and bearish outlook mean that "how low can it go?" is now almost a redundant question, as prices hurtle towards the point where extracting gas and moving it to consumers is simply uneconomic.
Current prices are perilously close to Russia's estimated short run marginal cost of around $2.50/MMBtu, and may even challenge Norway's much lower $1.50 to $2.00/MMBtu range.
Gas markets in 2020The gas markets entered 2020 from a position of consistently low prices driven by the double-edged sword of growing supply and suppressed demand - albeit with minor and sporadic support from gas-fired generators taking advantage of low gas prices.
Any hopes from gas producers that a new year would bring with it a new upward resurgence in prices was quickly dashed, as already weakening Asian demand growth contracted further on the back of the unforecastable coronavirus. Mild weather and record high wind generation dealt another blow to gas demand, further suppressing prices and exacerbating the downward trend.
The current market fundamentals make for downbeat reading:
- Storage – the combination of weak demand and resilient supply has meant that gas storage levels are, by historical standards, extremely high, having started the October 2019 Gas Year at 100% of capacity.
- LNG – despite low prices, supplies of LNG, particularly from the US, have been finding their way to the market at a hitherto unprecedented rate. While S&P Global Platts Analytics foresees a reduction in LNG exports to Europe from 2021 lending support to gas prices, the market will remain over-supplied, creating further downward price momentum.
- New import infrastructure – projects such as the 55 bcm/year Nord Stream 2 and the 30 bcm/year Turkstream project will serve to bring yet more gas to Europe. The loss of gas from the phase out of the Dutch Groningen field in 2021 will not be sufficient to offset the downward price pressures from these new supplies.
- Demand contraction – Chinese utilities have mooted demand contraction of up to 40% in the wake of the coronavirus outbreak, meaning there is even greater potential for Asian LNG volumes to come to Europe, particularly now that CNOOC, China's largest LNG importer, has declared force majeure. While there are likely to be long and drawn out disputes about the force majeure, the net effect in the short term will be further LNG volumes flooding into Europe, further softening prices.
Industrials’ cost burdenThe ongoing low prices and seemingly never-ending bearish outlook have produced a collective malaise amongst the gas community globally. However, sitting in the background is an often overlooked interested party for whom 16-year-low gas prices are manna from heaven – the industrial gas buyer.
Energy-intensive industries benefit greatly from drastic reductions in the cost of one of their main overheads. The volumes of gas consumed by industrial users such as, among others, the fertiliser, glass, ceramics, steel and paper industries often run into the high hundreds of GWh, sometimes into TWhs.
Taking advantage of low wholesale prices has always been a key priority for industrial energy buyers. However, in recent years the rising taxes and levies on consumption meant the emphasis partly moved away from wholesale costs towards non-energy costs such as transmission, distribution, taxes and metering charges.
In the current low-price environment this dynamic is changing and has created a renewed opportunity for intelligent buying to take advantage of market dips, rather than simply buying repeated spot volumes or hedging one or two years ahead.
Given the weak supply/demand outlook, there has never been a better time for industrial gas buyers to revaluate their gas procurement strategies and to follow the markets in order to take full advantage of the current low price environment.
As with all things commodity market related, timing is everything, and the low price environment will not be sustained forever. Our latest forecasts indicate a narrowing in the supply/demand gap between 2021 and 2023, giving renewed upward impetus to prices.
However, a renewed wave of LNG arising from new LNG capacity coming online around 2024/25 will see a further period of oversupply, and thus new opportunity for industrial energy buyers.