According to Business Monitor International (BMI), we are entering a new era of lower energy prices, driven by weak coal and oil prices. The collapse in oil prices since June has added impetus to the deflationary trend started by coal prices in 2011.
BMI expects oil prices to remain subdued in the coming quarters as continued strong US production largely offsets the negative supply impact of a slight cut to OPEC production, which is expected following the 27 November meeting. BMI has reiterated its long held view that oil prices are in a long term downtrend and its forecasts imply that the area of oil prices above US$ 100/bbl is over. The core view of Business Monitor is that Brent will strengthen slightly over the remainder of 2014 and stabilise in the US$ 90 – US$ 100/bbl range in 2015. Nonetheless, risks to this forecast are to the downside, particularly if OPEC does not agree on a coordinated production cut in November.
BMI expects sideways trade for thermal coal prices in 2915. Recent energy policy revisions in China mean that the world’s largest importer of thermal coal is likely to curb shipments in the coming months. Chinese imports have already disappointed in 2014, down by 8.7% in the first nine months of the year. Weaker import demand from China will exacerbate oversupply on the global market and poses a significant downside risk to BMI’s already below consensus average price forecast of US$ 74/t for 2015.
Regional dynamics will dictate natural gas price movements more significantly that oil and coal prices, according to BMI. A seasonal surge in winter demand should provide support for prices the coming months. Looking longer term, the outlook is less positive. In Europe, the dark spark spread has made gas fired power generation uncompetitive and with lacklustre demand there is little upside for gas consumption keeping prices low. Admittedly, US (Henry Hub) prices will trend higher in the coming years as LNG export infrastructure opens up the US market to foreign demand. However, higher US prices will come at the expense of lower European and Asian prices as buyers in these regions increasingly opt for cheaper US supply. Global natural gas prices will therefore gradually converge in the coming years at a level above current US prices but below current European and Asian prices.
Adapted from a report by Emma McAleavey.
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