Julius Baer Research | US natural gas prices surged more than 5% yesterday in part driven by slowing production and warm weather forecasts suggesting increased power demand. The official monthly statistics released yesterday showed a sequential decline of natural gas production in March, confirming the view among analysts that the shale oil drilling downturn will weigh on associated natural gas supplies.
However, the North American market remains awash with gas following an exceptionally mild winter and muted heating demand, and it will require a pronounced dent in production to ease the glut over the coming months. Prices have recovered sharply from the mid-January lows but remain historically low. Thanks to cost reductions and productivity gains large parts of the industry are able to operate profitably with prices at and below USD 2 per million British thermal units. We maintain our constructive view on natural gas rising power plant demand and stalling production should reign on the supply glut going forward, which, however, is largely anticipated in the futures curve.
Elsewhere, Norwegian maintenance work lends temporary support to European gas prices. However, the big story remains rising Australian exports and the ramp-up of the US first liquefied natural gas terminal. Europe is set to become the dumping ground for the rising tide of global gas supplies, put lasting pressure on prices.
Solid summer power plant demand and slowing gas output from shale oil wells are set to slowly remove the market’s surplus and support a constructive view on US natural gas prices. The ramp-up of Australia’s mega projects and US liquefied gas shipments is set to put lasting pressure on Asian and European natural gas prices.
*Image: Flickr/ Bilfinger SE
