Until a decade ago, the prices of natural gas in Europe were tightly linked to oil prices. Back then, gas delivery points and gas markets were highly segmented across Europe, natural gas competed with oil and oil-derived products for power generation, and most supplies of natural gas were indexed to oil prices.
This summer, however, European natural gas prices have not followed the typical oil price trends. Rather, they followed their own supply-demand and pricing logic, highlighting a fundamental change in Europe’s natural gas supply and market.
Today, the gas market is not about following the oil price movements, because gas sourced at one place and shipped in one way to a European hub or point of consumption has started to compete with gas sourced at another place delivered through another means to another hub. The gas market is no longer localized, and competition has increased with the growing number of interconnectors and pipelines from various gas-producing countries competing among themselves, and competing with liquefied natural gas (LNG), which also comes from a growing number of counties.
“There’s been a move toward a more globalized gas world, where gas could be moved around more readily, but the substitution link with oil has broken off, so oil and gas are not competing against each other,” Muqsit Ashraf, Managing Director and global lead for energy at Accenture Strategy, told Bloomberg. Related: Oil Jumps On Bullish EIA Data
This summer, Brent Crude prices—currently at around $76 a barrel—have faltered a couple of times since briefly hitting $80 in May. On two occasions, in mid-July and in mid-August, Brent plunged to the low $70s as fears started to emerge about the health of the global economy and oil demand growth amid concerns over the ongoing trade wars. Hedge fund and other money managers have also been liquidating bullish positions, cutting their net long position in crude oil and refined petroleum products in 13 out of the past 18 weeks, according to estimates by Reuters market analyst John Kemp. Hedge funds currently hold the lowest volume of petroleum products in contracts with long positions in nearly a year.
On the other hand, natural gas prices in the UK surged to the highest for a summer season, with Europe’s natural gas market the most bullish in years, as higher-than-expected summer demand and a tighter market drive natural gas price futures to levels last seen during this past winter’s supply crunch.
The past winter season in Europe was one of the coldest this decade, sending gas demand soaring and the level of natural gas stored in tanks across Europe dropping to below average levels.
The cold spell in Europe at the end of February and early March led to record withdrawals in the first quarter of 2018, and storage levels dropped to 18 percent of capacity—well below the five-year range, the European Commission (EC) said in its Q1 Quarterly Report on European gas markets. By the end of the winter season, natural gas stock levels dropped below 10 percent of capacity in countries such as Belgium, France, and the Netherlands, where high gas demand from the UK contributed to strong withdrawals this winter, the report said. Related: IEA: Oil Market To Tighten Toward Year-End
In the spring and summer, demand in Europe stayed high. First, because gas storage levels were low, and second because some of Europe’s other traditional gas-supplying countries decreased supplies over issues or maintenance at facilities. In addition, utilities across Europe were seeking more gas-fired power generation because the prices of EU carbon dioxide (CO2) emissions allowances under the EU Emissions Trading System surged to a 10-year high, so utilities prefer to use more gas-fired power generation at the expense of the more emission-intensive and polluting coal.
While Brent Crude prices have been rangebound in the around $75 a barrel territory, natural gas prices in Europe followed the gas supply and demand logic and rallied this summer. Analysts and traders see more room for rises in the months ahead as winter approaches.
With the development of gas hubs, gas trading, and LNG imports and trade over the past decade, the share of gas supply indexed to oil in Europe has dropped to below 30 percent now from some 80 percent in 2005, Accenture’s Ashraf told Bloomberg.
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In Europe, competition between various sources of gas rises, Ashraf says, adding that “Gas is competing with gas: piped gas from Russia is competing against piped gas from North Africa, competing against LNG from Qatar, LNG from Nigeria, and soon LNG from the U.S.”
By Tsvetana Paraskova for Oilprice.com
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Combined cycle and local pollution issues have modified this relationship a little.The big deal today is fracking. Global oil prices are held down by the cost of crude from the Permian and Williston Basins. Meanwhile, US natural gas from fracking has become so abundant that it almost makes its own price. Maybe there is some coal/gas fired cement plant somewhere that is the new Peoria, I dunno.
People who evidently don't have much of a clue about economics are even talking about LNG out of the Texas gulf. Look at it this way. If fracking works in the US, it will work elsewhere. $9 LNG is too rich for my blood looking down the road. Have you ever re-negotiated a long term contract based on "current market conditions"? It's a circumstance that can work both ways.
Ultimately, natural gas from fracking (just a new mining technique) will likely become the marginal fuel source for power generation for most of the world. That ain't gonna be no $9.