PIRA Energy Group’s Natural Gas Market Update for the Week Ending March 30

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Degree of natural gas production cuts uncertain in North America, while European spot gas prices are being dictated by supply changes, not demand changes.

PIRA Energy Group
Uncertainty surrounds the adequacy of gas production cuts relative to the limits on storage space in North America.

NYC-based PIRA Energy Group believes that uncertainty surrounds the adequacy of natural gas production cuts relative to the limits on storage space in North America. Globally, supply changes are dictating spot price formation, rather than potentially larger demand changes. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*Uncertainty Surrounds Production Cuts as Heating Season Ends with Gas Storage Glut. Gas storage levels are extremely high at the end of the heating season. While some production cuts have been seen, uncertainty surrounds the adequacy of such drilling cuts relative to the limits on storage space. This raises the likelihood of "storage congestion pricing" following the peak cooling season.

*U.S. Gas Storage Injection Larger than Expected. For the week ending March 23, the EIA weekly storage update jolted the market with a reported stock build that beat the market consensus, as well as the high end of the range of expectations. Such a bearish miss was greeted with another round of NYMEX selling. Above-normal temperatures dominated the nation, causing gas-weighted heating degree days to plummet to levels last seen in early October and residential/commercial loads to decline week-on-week. On the supply side, U.S. production posted a modest week-on-week gain, led by offshore Gulf of Mexico production, but reduced net imports were offset by another cutback in Canadian exports.

*European Gas Spot Price Formation Dictated by Supply Changes, Not Demand Losses. When it comes to European spot gas price formation, supply is king and demand is just a mere pawn. Nearly insignificant supply losses, like those seen at the Elgin and Franklin gas fields, are leading to outsized spot buying even though the market is about to lose significantly more seasonal gas demand over the next month. From a supply-demand perspective, it makes no sense to prop up prices based on these supply losses. The expectation of bigger supply losses down the road has the market in a sort of trance, where very real demand-side bearishness is ignored in favor of focus on any type of supply change relative to last year.

*Lower Expected Norwegian Gas Flows Are Temporarily Supporting Prices. The shock effect of forecast lower Norwegian gas flows through Langeled and other pipelines is having a greater effect on prices than the fact that demand at the other end of the pipeline is nonexistent. The primary support on the demand side is the very real incentive to store as much gas as possible early in the injection season.

*Incremental Qatari LNG Volumes Shifting to Asia in Search of Higher Netbacks. In the wake of large-scale shale gas production in the U.S., the latest European import data reveal the trade shift that PIRA has been anticipating since Qatar put its last two mega-trains into production. Most incremental Qatari volumes are shifting towards Asia, bypassing Europe in search of higher netbacks. Only a weak Asian market will push Qatari volumes back to Europe. In addition, Qatar has been sprinting to lock down longer-term deals in Asia prior to the next batch of regional LNG supply from Australia and PNG, and to a potential shale production explosion in China, which would limit market demand growth late in the decade.

For Additional Information

The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

PIRA Energy Group
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New York, NY 10016

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