OPIS Insights

Watch: Barron’s Senior Energy Writer Laura Sanicola and OPIS Principal Analyst for Natural Gas Luka Powell discuss what’s ahead for energy this week.

Watch this week’s episode for insights into what could be impacting gas prices heading into the summer and why international European and Asian benchmarks are not moving as volatilely as crude.

Transcript:

LAURA SANICOLA: Hi, everyone. This is Laura Sanicola, author of Barron’s Energy Insider, and I’m here today with Luka Powell, principal analyst for European Gas at OPIS. Luka, thanks for joining.

LUKA POWELL: Thanks for having me.

SANICOLA: Yeah. So all signs kind of point to longer closure of the Strait of Hormuz than maybe we all bargained for a couple of months ago. At least that’s how it reads right now.

And yet I just continue to be surprised that gas prices, international European and Asian benchmarks, are not moving as volatilely as crude. Maybe you could break down for us why that is.

POWELL: I think at the moment, the markets have benchmarked in, I guess, an extended amount of time without access to those gas and LNG. So most of that is due to the fact that it’ll take time for the facilities to recover for so Ras Lofan. So I think just from a starting point, we weren’t expecting a quick turnaround. So I would say that that probably plays some role in terms of the maybe slightly less volatility compared to crude.

But on the other hand, we’ve had kind of favorable weather conditions as well. So especially as we’re in spring right now, we don’t have as much cooling demand or even heating demand. But that’ll bring us potentially some issues as we head into the summer. There’s a couple of things that I think we need to keep an eye out for in terms of maybe seeing some more volatility for pricing.

So the first from a European perspective is that our gas storage levels remain quite near the bottom of the five year range, which is tracking a trajectory kind of closely to what we were seeing in 2022. It’s currently sitting at around 32% full, which is a little bit up week on week, which shows that there are injections despite the still elevated pricing environment, but we’re still seven percent below this time last year. So not a great place to be in at the moment. And obviously we’ve got a while to go until we have to refill.

SANICOLA: So not quite out of the woods just yet is what you’re saying. What else could be impacting gas prices heading into the summer?

POWELL: Yeah. Not yet, unfortunately. So while again, the Qatari supply disruption we’ve, I guess, expected that it’ll be prolonged. It’s not comparable to Russia or the losses that we saw in twenty twenty two in Europe from Russia, but we’ve still got some compounding events. So firstly, just last weekend, we saw the beginning of the Russian phase out for gas and LNG. That’s gonna continue over the next year.

So in so last weekend, it was the end of long short term, sorry, Russian LNG contracts. Come June, we’ll have the end of short term pipeline contracts. And then from January to September, we’ll be seeing the end of the long term contracts. So while we have been phasing out Russia gas and LNG since twenty twenty two, we’ve still got a little bit of a way to go.

A third element of risk, I guess, for Europe is and for Northeast Asia will be on the demand side. So it’s looking increasingly more likely that we’ll be seeing a super El Nino weather conditions this year. So that will raise cooling demand quite significantly from May to July, which is precisely our highest demand window for cooling needs. And this will be across Northeast Asia and the European continent. So seeing an upward revision of cooling demand plus this backdrop of a potentially prolonged conflict disruption to flows as well as cutting off even further Russian gas and LNG will intensify competition for LNG cargoes as we approach the bad quarter and into the winter of this year.

SANICOLA: And I just wanna end by asking about sort of the big news of last week, which is the UAE exiting OPEC. That had a lot of confusing read throughs for crude markets considering the fact that Middle East has about thirteen million barrels a day of of crude oil shut in, more than it had during COVID, like quite a bit, I think.

But, you know, there have to be gas read-throughs as well. Are there not?

POWELL: Yeah. So I think around 75 to 80% of UAE’s gas production is associated, meaning it comes up with the oil and therefore is directly tied to how much oil is being pumped. So if OPEC quotas are removed that I guess removes the ceiling on gas production as well.

But this kind of dovetails with expectations of further UAE capacity coming online in around 2029 as well. So that’s the Ruwais LNG facility. There’s two trains coming online and we’re thinking around 2029. So yeah, a little bit more coming out of the UAE with that in mind. But all that to say is we still need the straight to be open to be able to access those extra molecules.

SANICOLA: Right. Well, a lot to be looking at as we head into the summer. Thanks so much, Luka, for explaining this all, and thanks everyone for joining. We’ll see you next week.