January 4, 2015


After the oil price fall, is natural gas next? (Nick Butler, Jan 04, 2015, Financial Times)

After the dramatic halving of the oil price since June there is now every chance that natural gas will follow suit. Indeed the fall has already begun. During December, US natural gas prices fell below $3 per million British thermal units for the first time since 2012. But that is just the beginning.

Two further factors suggest a continued, and worldwide decline in 2015. First, in Europe in particular, gas supply contracts -- for instance from Gazprom into Germany -- are tied to the oil price. The link is historic and is gradually giving way to direct gas-to-gas competition. But the older, longer term contracts remain in place for now and that means that a radical downward shift in prices will occur through the coming year.

Secondly, after years of uncertainty since the 2011 Fukushima disaster, there are signs that Japan is ready to accept the gradual reintroduction of nuclear power. The initial steps will be small -- perhaps just one or two reactors at first. But even that will be sufficient to undermine gas prices in Asia which rose at times to almost $20/mmbtu as Japan was forced to substitute imported gas for nuclear. Each nuclear station brought back online will reduce demand for gas, and just as prices surged in 2011 now they will slip back. A Reuters survey of some serious analysts, including Wood Mackenzie, forecast a fall of up to 30 per cent in Asian natural gas prices in 2015.

Unlike the oil market, none of this has anything to do with the collapse of a producers' cartel (or depending on your world view, with a dastardly plan to use falling prices to undermine one political enemy or another). Nor does it have anything to do with Ukraine or the relations between Russia and Europe. There is no gas cartel and no producer has the power to set prices. The falling price is simply a matter of supply and demand. Supply is strong -- driven on by high prices in the last few years and by the US shale revolution. Demand on the other hand is fragile and in Europe is being continuously eroded by subsidised renewables. [...]

Lower natural gas prices clearly have a knock-on effect in the electricity market, putting further downward pressure on coal prices and making new nuclear look even more expensive. The fall will also make the notion of freezing electricity bills redundant. To freeze prices which are falling is hardly good politics.

Posted by at January 4, 2015 10:09 AM

blog comments powered by Disqus