Qatar revises natural gas prices forecast down
Qatar has revised down sharply its forecast for average natural gas prices a weighted average of European, Japanese and US prices from its April 2015 projection. The revision is due to continuing expansion of production in the US, record global inventories and weaker crude oil prices to which some natural gas contracts are indexed.
Qatar’s updated economic outlook for 2015-17 released yesterday by the Ministry of Development Planning and Statistics (MDPS) noted US natural gas production hit a new record in August 2015, as producers continued to supply larger volumes despite low prices.
By increasing operational efficiency and concentrating on proven production areas, specifically the Marcellus and Utica formations in the US, shale gas producers have defied expectations. The disconnect between expanding supply and moderate demand growth has put pressure on prices, as illustrated by one-month ahead gas futures briefly slipping below $2 per million BTU (mmbtu) in the US in October 2015.
Prices in Europe and Japan have also trended down. There is some dissonance about the outlook in these markets, with the World Bank predicting prices rising by 1.6 percent on average next year but with the International Monetary Fund taking a more negative view and forecasting a decline of 14.5 percent.
Since mid-2009, natural gas has been sold at prices that are substantially less than their energy equivalent parity with oil. Though since oil prices began to fall from mid-2014 this discount has continued to narrow. Oil and gas remain imperfect substitutes for one another, the Ministry document said.
Although markets for natural gas remain highly geographically segmented, prices are moving closer to convergence. The band separating US and Japanese natural gas prices has narrowed in 2015, with a spread of less than $7 per million BTU in October 2015. The US has lower prices, where most gas sales are made spot, and Japan higher prices, where gas is sold under long-term contracts.
In Europe, gas trades under a raft of arrangements and has been priced between the other two regions for the last five years. Whereas the IMF expects average global gas prices to bottom in 2016 and rise thereafter, the World Bank sees gas prices in all major regions increasing marginally.
US inventories are expected to be drawn on heavily in the winter ahead, while industrial consumption is forecast to grow sharply in 2016 as new plants fire up. Nevertheless, US gas supplies are projected to continue outpacing domestic demand.
US export opportunities are expected to expand markedly. Demand from Mexico’s power sector, and for power and non-power sectors in other parts of the world, will benefit from the Texas-based export-oriented Cheniere’s Sabine Pass LNG facility. This facility will start export operations in January 2016, with eventual export capacity of 31.5 million tons per year, once all seven trains are completed.
Several other export-oriented LNG projects are under development in the US, with a slated combined capacity of 33.5 million tons per year, excluding Cheniere. Eventually, gas exports should support Henry Hub prices.
In Asia, however, numerous Asian LNG projects are scheduled to come online and supply Japanese and Korean consumers, probably softening prices in that region.
In Europe, the outlook for prices is uncertain: they could be restrained by moderate economic growth, more aggressive marketing by Russia of its gas and an interest in diversifying sources of supply to the US—or bolstered by an increased reliance on gas as a source of energy reflecting drops in subsidies for renewable.