Bearish on Natural Gas Prices

There are a growing number of reasons to believe the price of Natural Gas in the UK Gas market (NBP) will enter a downward trend in the coming years.

In short, demand is going nowhere and there is a growing sentiment that indigenous supply might recover from a decade-long decline.

On the demand side, consumption plateaued over the last two decades. For perspective the combined economies of the UK and ROI have grown by more than 40% over that time period. So why have prices remained so high? The answer comes from the supply-side. Since 1995 UK domestic production has decreased by an immense 45%, allowing expensive imports to penetrate the market.

The good news is that it is on the supply side where we find real, concrete bearish fundamentals.

1. On August 14th E.ON announced it had tapped the largest Natural Gas discovery in the southern North Sea in the last decade. Continuously improving technologies and a number of recent promising finds, it is possible we could see production levels reverse their declining trend.

2. In early August the British Prime Minister Cameron said, “Britain would be making a big mistake if it ruled out fracking for natural gas on environmental grounds (…) I think we would be making a big mistake as a nation if we did not think hard about how to encourage fracking and cheaper prices right here in the UK”. To present date the strongest pro-fracking language to come from any UK government.

3. Westward flows from Russia have been notably up. Gazprom’s exports to Europe in January-June rose 9.6% year-on-year, which includes a 51% increase to the UK.

4. Seven Australian LNG export terminals are currently under construction and it has become clear that US facilities are gaining momentum. The US’s Dept. of Energy has approved three applications to ship LNG and industry analysts believe it will approve another four before pausing. The Russians are also planning on dramatically increasing their LNG exports before the end of the decade.

5. Centrica’s stock price just passed its pre-recession all-time high, achieved back in 2007. Its growth through US-acquisition strategy is one investors seem to like as it has aggressively entered the US market. It also signed a 20-year deal in March to import liquefied natural gas (LNG) from the United States from 2018 and has long-term supply deals with Qatar and Norway.  With the growing number of downward pressures, the assumption of a continued rise in prices appears to be unwarranted. Like anything else, only time will tell.