The deep fall of natural gas prices at the Hubs seems to have stalled for the moment. In the US, the deep fall of Henry Hub spot natural gas prices below 5 euro per MWh has reversed into an uptrend with prices already higher than 8 euro per MWh. UK NBP Hub prompt gas briefly traded over 10 euro per MWh last week. Does this mean that gas prices have started a new upward trend?
I don’t think so. First of all, it is not unnatural that prompt gas prices start to rise at the end of September as the weather is getting colder. We should take into account that prompt prices are still lower than the forward prices for e.g. nov/09 or Q1 10. It is therefore logic that the prompt prices rise as those forward periods approach. It is important to notice that the forward prices are not rising. At 15,41 euro per MWh, TTF Cal 10 gas is still close to its historic lows. As long as these forward prices are not rising, it would be deceiving to speak of a bull trend in gas prices.
Nevertheless, Hub gas graphs currently show the end of the downtrend. The question then is whether this could reverse into an uptrend. To answer that question we have to take a look at the fundamentals that have pushed the gas prices to such lows. The one reason was the decline in gas demand due to the economic downturn. European gas demand has been down 20% for most of 2009. Industrial gas consumers have reduced their production and hence gas consumption. And power producers shut down the marginal gas-fired power plants as demand for power has also fallen because of the downturn. The situation in the US looks similar or even worse. LNG ships have recently sailed to Europe to avoid even lower Henry Hub prices in the US. This has caused a supply glut that caused European prices to drop. Not even the biggest optimist on this planet expects the economy to recover swiftly in the next few months. Therefore, we shouldn’t expect the demand for gas from industrials and power producers to recover fast. The conditions for low gas prices could continue throughout the next winter.
Hub gas prices could rise:
- If this winter was very cold in Europe and/or the US, causing a spike in residential gas demand,
- If industrial demand would unexpectedly pick up fast,
- If supply from Russia would be cut due to the conflict over gas supply with Ukraine (the Ukrainians and Russians have been fighting over payments for most of the year).
This last if brings us to the supply side of the balance. Gazprom has announced that it will cut its supply to the lowest level ever. That is the natural economical reaction of any supplier. When prices drop, they rather keep the gas under the ground than sell it at the low prices. On the other hand, the current situation cuts deep into the flesh of gas producers. Many of them must be desperate to get some income by at least selling some gas. I therefore doubt if the totality of suppliers will be able to cut supply by more than the decrease in demand.
A lot of ifs, but you can count on us to observe whether they materialize or not. And the first place where we will read it, is in the price graphs.
