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Gas price volatility to remain despite easing supply concerns

AEMO has revised its outlook on Australia’s east coast gas market, outlining that previously predicted shortfalls in gas supply would be avoided in the longer term to 2030. However, despite easing supply concerns, higher prices are likely to remain in place as intermittent wind generation and higher winter demand underpin ongoing volatility.

 

The latest AEMO Gas Statement of Opportunities (‘GSOO’) announced in late June outlined the market operator’s 2018 forecast of annual gas consumption and demand, and assesses the east coast and south-east gas market’s ability to meet demand over the next 20 years.

 

Encouragingly, the report noted that ‘no supply gaps are forecast before 2030’ due in part to increased supply from LNG projects and conventional generation, linked with lower electricity demand due to higher renewable generation.

 

While the GSOO is forecasting that gas supply will meet demand, it doesn’t outline at what price. However, the announcement from AIE import terminal that they will offer $10/GJ provides an indication that pricing is expected to remain at higher levels when compared to the previously seen $5/GJ - $6/GJ range.

 

As a result, Energy Action’s view is that current fundamentals will continue to support a higher gas price and maintains its view that price drivers including higher winter demand, intermittent wind generation levels, and ongoing speculation about the NEG will remain.

 

Retailers’ reaction to ongoing volatility

 

In the context of expected volatility which can be compounded by unforeseen supply disruptions, and in light of retailers recently withdrawing pricing in response to volatility, it is important to consider the potential risks and be prepared to accept offers quickly.

 

A good example was the recent unplanned maintenance of Esso’s Longford gas plant, that caused short term supply issues which resulted in the Victorian gas balancing hub price increasing from circa $9.50/GJ on 20 June to a high of $13.98/GJ on the 21 June.

 

Despite the supply reduction, Energy Action’s view is that this price spike was also the result of higher demand and lower wind generation. This led to some electricity retailers withdrawing offers – not uncommon when spot or futures volatility occurs.

 

At the same time, forecast prices for the NSW, SA and QLD balancing hubs increased to circa $14/GJ on the 22nd June, up from $9/GJ to $10/GJ on the 21st. While prices have now moderated, Energy Action expects volatility to remain and support a steady or higher gas price over the short to medium term.