Natural gas use is on a tear in Europe, buoyed by a recovering economy and demand for cheaper and cleaner alternatives to coal. That’s poised to carry over in 2018, helping producers from Russia’s Gazprom to traders such as Trafigura Group and RWE AG.
Here’s five questions market participants are asking to gauge whether the rally will continue:
Is demand really back?
Gas consumption in the European Union surged 14% in the three months through September, the seventh quarter of growth. That was against a backdrop of double-digit gains in the price of coal and carbon-emission permits last year, which made it more expensive for utilities to burn the dirtiest fossil fuel.
“Slowly, the power sector is coming back for gas demand, and there’s potential for more of that this year,” said Rolf Schlausch, an analyst at Wingas GmbH in Kassel, Germany.
Even so, hurdles to repeated strength in demand still remain, such as warmer weather, slowing economic growth and weaker coal and carbon prices. Consumption gains may be as low as 1 to 2% in 2018, according to estimates from Deutsche Bank AG and Sanford C. Bernstein Ltd.
Will LNG imports start to increase?
More liquefied natural gas probably will flow into Europe to replace lower production from fields within the region. But how much arrives depends on the thirst for energy in Asia - especially China - where the nation’s fight against smog has focused on substituting gas for coal.
Asian nations have been willing to pay more for LNG than what deliveries to the UK can command. That premium is near its highest level since October 2014 because of China’s skyrocketing imports. Statoil ASA and Gazprom expect that dynamic to continue, suggesting little room for the sort of big rise in LNG imports that might ease prices.
Still, the share of LNG of Europe’s gas market is expanding. It may take a 13% share this year, about the same as it was in 2012 before flows from pipelines won out, Bernstein forecasts show. A long-anticipated wave of LNG may begin to hit next year, when the securities firm expects the super-chilled fuel to have almost 16% of the market.
Will Russia and Norway keep up their record shipments?
Russia and Norway are Europe’s biggest suppliers and want to keep this year’s shipments near the banner levels of 2017. Gazprom and Statoil expect pipeline flows to remain robust, since most of the world’s new LNG volumes will go mainly to Asia.
“New LNG project start ups will facilitate more LNG imports in Europe, but with domestic production going down, Russian exports will remain sustained,” said Massimo Di-Odoardo, an analyst at Wood Mackenzie Ltd “We will need to wait until 2019 before increased LNG imports will test Russian appetite to compete for market share in Europe.”
What happens to Europe’s biggest gas field?
Flows from the Groningen field in the Netherlands has fallen gradually in a bid to stop earthquakes triggered by extracting the fuel. While the current annual production cap of 21.6bn cubic meters remains, the Council of State, the nation’s highest administrative court, in November gave the government a year to come up with a new plan.
More quakes could spur more drastic measures. On January 8, Groningen was hit by the region’s biggest tremor in more than five years. Two days later, field operator Nederlandse Aardolie Maatschappij BV, a venture between Royal Dutch Shell Plc and Exxon Mobil Corp, proposed a “substantial reduction” in output. The Dutch government must endorse the plan. Any decision will impact the outlook for the continent’s gas supply.
How is the UK coping
Britain’s biggest storage facility, the Rough field, is approaching the end of its useful life. That leaves traders in the UK with one less option for stockpiling fuel in the summer to meet winter demand.
To get around this, traders can export the fuel from Britain to storage sites in mainland Europe in the summer in hopes of bringing it back when the chilly season arrives. They can benefit from more volatile prices and the difference between the cost of the commodity in different seasons. There’s also smaller storage sites in Britain that are suddenly more able to generate business.
Supplies from the Netherlands and Belgium through pipelines are already at a record high since the start of the year.
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