Will natural gas prices fall even further? OIES says they could drop below 3 USD/MMBtu

The price of natural gas on wholesale markets in Europe could, according to the Oxford Institute for Energy Studies (OIES), fall to well below 3 USD/MMBtu (approximately 9 EUR/MWh) under a combination of several factors. The key factors will be the surplus of LNG flowing into Europe and low gas consumption. 

The price of natural gas on wholesale markets has fallen substantially this year, reaching nearly 3 USD/MMBtu before rebounding higher. However, the OIES analysis says there is a possibility that natural gas prices could move even lower.

Natural gas prices on the UK NBP spot market (National Balancing Point) were last below 3 USD/MMBtu in September 2003. Since then, they have been substantially higher, with prices rising to approximately 18 USD/MMBtu at the turn of 2005 and 2006.

One of the main reasons is the growing capacity of liquefied natural gas (LNG) export terminals. Global capacity is currently growing by as much as 50 bn m³ annually. As a result, LNG imports increased by approximately 26 bn m³, with 15 bn m³ of this increase stored in European gas storage facilities.

A warm winter could be a decisive factor

The OIES analysis assumes that, under normal conditions, approximately 52 bn m³ of natural gas will be withdrawn from storage during the winter. This volume can only be replenished in storage thanks to European LNG imports. By the end of September, storage facilities could therefore be completely full again.

However, a different situation could arise if several assumptions are met. These include a warm winter and lower demand in Asia, South America and the Middle East. All these factors could result in withdrawals from European storage facilities during the winter period amounting to only 30 bn m³ of gas.

As a result, storage facilities could fill up much earlier during the summer, possibly as early as the end of June. Further gas deliveries during the summer period, with nowhere to store them, would then create additional pressure on gas prices in Europe, which could fall below the aforementioned threshold of 3 USD/MMBtu.

The OIES study notes, however, that a number of factors could offset low gas prices, such as reduced imports via pipelines. Another factor could be increased natural gas consumption at combined-cycle gas power plants, which would replace coal-fired power plants due to their higher profitability.