Main hubs of natural gas
Let us starting with an introduction about the meaning of a gas hub. A gas hub is a central infrastructure networks for natural gas when transported through pipelines and for liquified natural gas when transported through vessel. This network is used as central pricing point for the stakeholders.
Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub. The second one situated in Europe is the Britain’s National Balancing Point (NBP) used as an the main indicator for Europe wholesale gas market. Finaly the Dutch Title Transfer Facility (TFF) which is mainly due to its huge Groningen onshore gas field and being the center of a large pipeline network. EAX hub stand for East African Commodity Exchange.
https://www.erce.energy/graph/uk-natural-gas-futures-curve
A Therm (thm) equal 100’000 British thermal units (Btu).
The graph above is taken from the National Balancing Point introduced before. It represents the future price from January 2019 to May 2025 taken at four different points in time. There are 3 trends that can be analysed. The first one being the seasonality which we have already seen last week, then the global trend in time and finally the variation of expectation from May compared to the three other months.
We can observe a global trend over time which is price decreasing. This fact is mainly due to the new American technology to extract gas named shale gas. The so called shale gas revolution allowed United States to change from gas importer in 2007 to an exporter in 2017 and expected to become a global LNG player. However, the decrease of price is quite low for the main reason that the Asian demand for the next 5 years is expected to grow for its low C02 gas emission and replace coal energy still largely used in China.
Finally, the variation of expectation from May compared to the three other months, from our point of view is due to the announcement of China to try to stop using coal and consume more natural gas as mentioned before.
Price movement, demand & supply analysis
From November 1st, 2018 until Friday November 16th, 2018, the price of natural gas has raised by 31%. The three reasons that demonstrate this increase are the winter, the current low inventories of this commodity and the drop in oil’s price. Indeed, the cold season is coming earlier and is colder. This season increases the demand of natural gas and LNG to heat homes.
The price of oil has dropped by 14% for the month to date (November 1st to November 16th, 2018). The reason is that companies which produce oil, LNG or NG are switching their production to natural gas in order to meet the huge and growing demand of this commodity. As a result, this switching is influencing the increase of 31% of natural gas.
On the supply side, US Energy Information Administration reported that total stocks stand at 3,247 trillion cubic feet, which is 528 billion cubic feet lower than the prior year at the same period. Inventories are facing a storage deficit which makes the price subject to be greater than previous years.
As a whole, the demand and supply side effects seen above influenced the price movement of NG and LNG. Until the end of the year, the demand will push the price higher, in a quickly or gradually way. This could be seen also on the future contracts which show an increase until the end of the cold season (between February and March 2019).
We recommend in a short period to be prepared to sell LNG and NG because the spot price will certainly show a backwardation against the forward price.
Until the end of the winter (long-term period), we also recommend to sell LNG and NG, knowing that the houses would be frozen by the cold, the spot price will be higher than the forward price.
Anecdote
Storage of natural gas (in US):
Depleted natural reservoir (about 80%): Old reservoirs of gas that are empty: reused as a storage facility.
Salt caverns (about 10%): Highly reliable because of the salt is very strong and retain gas well. Capital intensive.
Aquifers storage caverns (about 10%): Usually once a year because it is very capital intensive and to control.These types of storage facilities are usually used only in areas where there are no nearby depleted reservoirs. In normal times, facilities are operated with a one winter withdrawal period during high peaks. May be used to meet peak load requirements as well during other times (summer).
Total underground storage in US: about 10mio Cubic Feet
Above ground: Gas tanks: Very short term but easy to fill up and take from. In the pipelines: line packing (inject higher quantity through the pipelines) LNG: 1/600th of normal gas space, more flexible than pipelines (can change suppliers and/or sellers). Capital intensive ($billions).
Capacity in Million Cubic Feet
Sources
Caverns: Home. (2018). Underground Natural Gas Storage. [online] Available at: http://www.energyinfrastructure.org/energy-101/natural-gas-storage [Accessed Nov. 2018].
Eia.gov. (2018). U.S. Underground Natural Gas Storage Capacity. [online] Available at: https://www.eia.gov/dnav/ng/ng_stor_cap_dcu_nus_a.htm [Accessed Nov. 2018].
SAEFOND, Myra P, 2018. “Natural gas will soon find more fuel to feed its rally”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-will-soon-find-more-fuel-to-feed-its-rally-2018-11-16?siteid=rss&rss=1
Market Watch’s forward prices, 2018. “Recent contracts”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/investing/future/ngf19
Market Watch’s Natural gas spot prices, 2018. “Natural gas (Henry Hub) in USD – Historical prices”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd/1.11.2018_19.11.2018
SAEFOND, Myra P, 2018. “Natural-gas futures drop further with weekly U.S. supply up 39 billion cubic feet”. Market Watch (online). November 15th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-futures-drop-further-with-weekly-us-supply-up-39-billion-cubic-feet-2018-11-15
HOGUE, Tom, 2018. “Q&A: What is a gas trading hub, and how are they established?”. Reuters (online). December 29th, 2017. (Consulted on November 20th, 2018). Available to the following URL: https://www.reuters.com/article/us-china-gas-exchange-q-a/qa-what-is-a-gas-trading-hub-and-how-are-they-established-idUSKBN1EN0I1
ERCE, 2018. “UK Natural Gas Futures Curve”. ERCE (online). (Consulted on November 20th, 2018). Available to the following URL: https://www.erce.energy/graph/uk-natural-gas-futures-curve
ICIS, 2018. Comparing natural gas prices as Europe and Asia compete for US LNG”. ERCE (online). (Consulted on November 20th, 2018). Available to the following URL: https://s3-eu-west-1.amazonaws.com/cjp-rbi-icis/wp-content/uploads/sites/7/2018/09/03034112/comparing-natural-gas-prices-as-europe-and-asia-compete-for-us-lng.pdf
USAID, 2018. Futures market a boosts for the EAX”. USAID (online). (Consulted on November 20th, 2018). Available to the following URL: https://www.eatradehub.org/futures_market_a_boost_for_the_eax