Why gas prices are likely to continue to outperform oil prices

by  — 30 June 2013

Gas prices are likely to continue to outperform oil prices in the near future, according to QNB Group.

Oil and gas exhibited opposite trends in 2012. Global oil production grew more rapidly than consumption, whereas gas demand growth outstripped supply. This meant that average gas import prices rose much more strongly than oil prices. This relative trend is likely to continue in the near future, even though global demand for petroleum products is likely to soften in the months ahead, according to QNB Group.

Data recently released in British Petroleum’s (BP) Annual Review of World Energy shows that global oil production grew by 1.9 million barrels per day (b/d) in 2012, an increase of 2.2 percent over the previous year and one of the largest increases in recent years. However, consumption grew by less than half this amount (0.9m b/d), as higher demand in emerging markets was partly offset by declining consumption in Europe and the US.

The US provided the main contribution to production growth (1.0m b/d), driven by shale oil developments which helped deliver the largest annual increment ever in the US. Libya followed closely behind, as production moved back towards pre-regime levels. Qatar was also one of the major contributors, providing a 6.7 percent share of the growth in global supply, largely from condensates linked to higher North Field gas production. Meanwhile on the negative side, Sudan and Syria suffered major stoppages due to conflicts, a long-term North Sea oil decline trend continued in Norway and the UK and Iranian production fell by 0.7m b/d, as sanctions bit.

In contrast to oil, gas consumption growth of 7.1bn cubic feet per day (cf/d, equivalent to 1.3m b/d of oil) outstripped production growth (6.1bn cf/d or 1.9 percent). East Asia led the demand growth, particularly given the impact of Japan’s shutdown of most of its nuclear power plants.

The US was also the largest contributor to gas production growth, producing an additional 3.0bn cubic feet per day (cf/d), nearly half the net increase in supply. Other major contributors to the growth were Norway (1.2bn cf/d), Qatar (1.1bn cf/d) and Saudi Arabia (1.0bn cf/d). The main declines in production were in Russia, the UK, India and Indonesia.

These factors were supportive of gas prices. Whereas the average benchmark Brent oil only rose by 0.9 percent in 2012, most major benchmark gas prices saw much stronger increases. QNB Group’s weighed average basket of the three main benchmark gas import prices (Japan, Europe and the US) increased by 15.6 percent, led by the Japanese LNG import price which averaged a record USD16.6/mBTU, while European gas imports reached USD11.5/mBTU, the second highest on record after 2008. The only exception was the US, where prices declined owing to the surge in domestic production. However US prices have been picking up recently and averaged USD5.9/mBTU in the first quarter of 2013.

An important development in the gas market was that the volume of LNG exports (about a third of total traded gas) experienced its first ever annual decline in 2012, falling by 0.8 percent to 241 million tonnes per year (t/y). The largest decline was in Indonesia, where LNG exports fell by 3.1 million t/y, largely as a result of lower gas production in its Mahakam block. Algerian exports fell by 1.9 million t/y, continuing a long-term trend of decline as insufficient investment has caused gas production to stagnate since 1999, while domestic demand has continued to grow. Egypt and the UAE have faced similar dynamics in recent years, and are planning to increase LNG imports even as they continue to export some LNG to meet outstanding contracts. The bulk of supply growth came from Qatar, where exports increased by 3.7 million t/y, according to the BP data. Smaller amounts of new supply came from Russia and Trinidad.

On the demand side, there were significant shifts in the customer base. Japan’s LNG imports grew by 8.7 million t/y, as gas substituted for lost nuclear power generation. By May 2012 all of Japan nuclear plants had been closed for maintenance. Net demand growth in the rest of Asia totalled 9.2m t/y. Conversely, LNG demand fell substantially in the UK (by 8.2 million t/y), as it substituted LNG with pipeline gas, mainly from Norway. LNG imports also fell in the US, France, Spain and Italy. The geographical shift in demand from the US and Europe to Asia is beneficial for LNG exporters, according to QNB Group, given that LNG in Asia sells at a considerable premium compared with most other regions. Asia represented a record 69.3 percent of global LNG imports in 2012, compared with 21.1 percent for Europe and just 1.5 percent for the US.

Looking ahead, QNB Group expects gas demand growth in Asia to continue to lead the global market. Demand growth in China and Southeast Asia is likely to more than compensate possible reduction in other parts of the world. This should be supportive of LNG prices in the near term even if oil prices, which slipped below USD100/barrel last week, decline further. In addition, Japan decided in September 2012 to cease using nuclear power by 2030, which will support demand for gas. Overall, QNB Group expects gas prices to outperform oil prices in the near future.

Like this story? Share it.




22-24 Apr Gulf Water Conference


28-30 Apr Corrosion Management Summit


12-15 May Project Qatar

Qatar National Convention Center

26-28 May Qitcom

Qatar National Convention Center

2-4 Jun Cityscape Qatar

Qatar National Convention Center

view all events ›