A fool’s game?
“Europe has enough spare capacity in liquefied natural gas (LNG) to meet a large part of the region’s needs if Russia retaliates against the latest EU sanctions by restricting gas supplies.”
That was the headline of just one week ago. So why has the gas price suddenly shot up again with Winter 2014 gas prices topping 61.5p/therm just days after they hit the bottom of a dip at 57p and electricity following suit now trading for season ahead prices at over £50.50 per MWH against £47 a week ago.
The shape of the market is actually a whole lot more complex than the headlines would have you believe.
Even though the fundamentals of a falling gas price are in place:
- High supply – by virtue of copious volumes of LNG from Qatar docking at UK stations
- Low demand – with the economy still in post-recovery phase and a mild winter having steadied consumption
- Ample storage – as high supply and low demand means surplus for a rainy (cold) day
Underneath is a very clear picture of a market whose fundamental direction has changed.
When winter 2014 was first traded back in 2009 and with this coming winter then 5 years hence, there was little data upon which to base long term prices with any degree of accuracy. As a result in such cases trader sentiment took over and we saw from 2009 through to October 2012 a gas market where prices ‘along the curve’ i.e. for future years were selling at a premium to immediate delivery i.e. today or next month or season.
In Q4 2012 this directional trend changed completely with the beginning of an 18-month period to April 2014 whereby the immediate season was more expensive than those months and years ahead.
In such a scenario both the long term gas price was falling and the ability to strike a competitive long term gas deal were at their height. Damage limitation it was not.
However in April 2014 the gas market took an about term, reverting to type and despite a mild winter, buoyant LNG and storage supplies the long term price curve began to move up again, initially however in a falling market.
July 2014 however is different, earlier this month we hit the bottom of the dip, and already prices have risen over 5% in the last week alone and with no sign of abating.
On top of this the forward curve is looking increasingly expensive for future seasons with a further premium of between 4% and 6% for 2015, 2016, 2017, 2018 and 2019.
Yet commentators still talk of all time lows, bearish demand and positive fundamentals.
So if the facts suggest the opposite just what exactly is happening?
We all know that gas is a tradable commodity; in its LNG form it is also a highly transportable one too. As such current LNG surpluses can soon become future shortages with the turn of a rudder and the economic drivers of Qatar and other LNG producers are such that they will set course for the region with highest need and therefore greatest willingness to spend.
Japan‘s energy landscape is about to become a big lock in the canal that is LNG with Qatar’s ‘gold’ replacing Japan’s x-rated nuclear economy.
Traders are jumpy at no news, bad news and even good news. No change there but amplified by Russia vs. Ukraine as both a terrorist fomenting ground that also happens to be the major producer and pipeline of gas to the West.
Add in ISIS, Syria and Iraq and you have gas, LNG and oil all facing their own and amplified geo-political pressures.
No wonder traders are nervous, they don’t know where to turn next.
So who’s right? Are we in a falling market for years to come as the market fundamentals change and abundant shale gas comes on tap. Or are we in the middle of utter uncertainty, the traders’ worst nightmare?
A bit of both.
The price has fallen for Winter 2014 from 74p/therm to 60p/therm over the 5 years to date.
But it has also increased from 57p/therm to nearly 61p/therm in 5 days
In addition the long term upward forward curve has returned and future seasons are anything up to 11% premium on already increasing near term prices.
This represents a situation in total contrast to just 9 months ago with prices at lows and falling further and with the forward curve up to 10% cheaper than the near term.
And yet the Ukraine situation hasn’t become an ‘energy’ situation, yet.
And Japan hasn’t showed it’s hand in the LNG market, yet.
Things could be getting a whole lot worse, the market normally prices in uncertainty, but with little certainty over that uncertainty the jitters on the trading floors are growing stronger.
The traders are right, in this period of uncertainty, with the knowledge of what we do at least know, there is only one bet. Upwards. Locking in now has to be the sensible choice. It could well get a whole lot worse in the days, weeks and months to come.