London — Royal Bank of Canada expects the current oversupply on global gas markets to continue at least into mid-2020 and has cut its European gas price forecast for next year as a result.
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In a report entitled "European Gas Strategy -- Tug of War", the bank said it saw few bullish signals over the remainder of the summer.
"We see the market as clearly oversupplied in 2019 and more moderately oversupplied in 2020, with really only China able to re-balance the market through continued demand growth," RBC said.
RBC said any spikes in demand -- which could push up prices -- were likely to be weather-dependent and therefore "difficult to forecast." RBC has updated its gas price deck call for 2020, forecasting an NBP price of 45 p/th, down from 52 p/th previously.
The forecast is lower than the current 2020 price on the forward curve, with S&P Global Platts assessing the Cal 2020 NBP contract on Thursday at 50.38 p/th.
S&P Global Platts Analytics current forecast for the NBP in 2020 is more bearish to market at 41 p/th.
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The oversupply -- on the back of a mild winter and a ramp-up in LNG supplies -- has also seen regional gas hub pricing differentials narrow "sharply," RBC said.
"Hub pricing in Europe and Asia has fallen well below our expectations, and with European gas storage filling at levels ahead of historical norms, it paints a pretty ugly picture for gas markets," RBC said.
"We do not expect many positive data points until we get through the summer, and we expect some of these headwinds to continue into 2020." European gas storages finished last winter well stocked after the mild winter, and have started filling at the fastest rate in many years "further compounding the issue of oversupply."
"In the short term, high storage means the potential for materially higher pricing seems unlikely, however given the shape of the demand curve through the year, we would look to October-November for gas storage to begin drawing," RBC said.
Another sign of an oversupplied global market is high LNG deliveries to Europe.
LNG has grown to become a key source of supply to Europe, RBC said, accounting for 10-15% of Europe's gas consumption so far in 2019 -- well up on previous years.
The "call" on LNG to meet European demand is set to grow to 2030 as domestic production declines, it said.
"In Europe, we see a declining demand picture as the combination of stagnant growth and the rise of renewables take market share. However with indigenous production on the decline, we think the region will remain dependent on LNG imports to satisfy demand," it said.
This includes increasing imports of US LNG -- or "freedom" gas -- which is expected to gain market share in Europe.
US officials earlier this year coined the phrase "freedom" gas to describe US LNG -- offering European countries an alternative to Russian pipeline gas.
In the longer term, RBC expects that European hub pricing is likely to be driven more by Asian demand and US LNG supply growth than local factors.
"We expect China's gas demand to outstrip the entire demand from all European countries by the mid-2020s, accounting for close to 600 Bcm of demand by 2030, versus Europe at around 440 Bcm by then," it said.
-- Stuart Elliott, Stuart.Elliott@spglobal.com
-- Edited by Jonathan Dart, firstname.lastname@example.org