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This winter it really is about the weather

By Ed Cox on 02-Sep-2016

The cliche about weather driving energy prices, in particular on European gas and Asian LNG, is just as relevant this year as ever before.

A mild weather with no extended periods of freezing cold in Europe could see forward gas prices steadily ease down despite fears over a lack of gas storage in the UK and a cut to the Dutch Groningen gas field output for the Gas Year starting in October.

Recent European supply shocks have provided short-term support to northwest gas hub prices but the relentless lack of demand has prevented any lasting impact.

Domestic European gas production may be in structural decline but even the return of gas-fired power generation to the money for September hasn’t been enough to put a squeeze on supply.

In Asia, the largest LNG consumers in Japan and South Korea have reported declining imports for over one year amid weak economies and with no real demand shocks last winter.

The uncertain role of coal and nuclear makes demand for LNG harder to strip out in east Asia but without a sharp weather-driven demand for greater gas-fired generation the case for a bullish winter is hard to make.

Even a rise in the price of oil, a key component in long-term LNG business, would take several months to filter through given the lagged time effect written into contracts.

Asian spot LNG prices have been in the $5.00s/MMBtu for several months – around a third the cost of previous winters after the Fukushima accident in Japan. This is only a small premium to winter gas contracts in northwest Europe.

As is the case in Europe, a sharp rise in demand from cold weather, accompanied by local supply outages, would likely lead to a spike in prices, especially if buyers have to come to the market to cover a drop in term deliveries from suppliers.

But with new Australian production already pushing flexible Qatari volumes west into the Middle East there are increasing supply options. Major sellers are actively managing their portfolios and able to keep cargoes within Atlantic and Pacific basins which could be redirected.

In Europe, the connection between hubs in the northwest can iron out regional price spikes pretty quickly. A cold February and March could provide a sting in the tail to spot pricing but it would need to be over an extended period. ed.cox@icis.com