Oil and energy markets:Recent developments, outlook, dialogues with producer countries, and data issues - Hoofdinhoud
Contents
| Documentdatum | 29-11-2005 |
|---|---|
| Publicatiedatum | 12-08-2009 |
| Kenmerk | 15097/05 |
| Van | General Secretariat of the Council |
| Aan | Delegations |
| Externe link | originele PDF |
| Originele document in PDF |  |
COUNCIL OF Brussels, 29 November 2005 THE EUROPEAN UNION
15097/05
ECOFIN 386 ENER 190
NOTE
from: General Secretariat of the Council to: Delegations
Subject: Oil and energy markets: Recent developments, outlook, dialogues with
producer countries, and data issues
Delegations will find attached a background note for the 6 December ECOFIN discussion on oil and energy markets, prepared by the Commission services.
________________________ EUROPEAN COMMISSION
DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS
Brussels, 22 November 2005 ECFIN/REP 55442/05 - EN
O IL AND E NERGY M ARKETS :
RECENT DEVELOPMENTS , OUTLOOK ,
DIALOGUES WITH PRODUCER COUNTRIES ,
AND DATA ISSUES
( WITH AN A NNEX ON GAS MARKET DEVELOPMENTS )
_________________________________ Summary of main findings and issues for discussion
Price developments over recent weeks indicate that the oil and energy markets seem to have become less tight, and short-term price expectations as reflected by forward markets have been coming down. This is mainly attributable to a certain slowdown in demand growth, additional supply capacities developed since the oil price hike five years ago now coming on stream, and the successful crisis management of the IEA system to deal with the temporary disruption of physical supply in the aftermath of the Katrina hurricane. On the other hand, the supply-demand balance is still rather tight both in terms crude production and refinery capacity, leaving the market sensitive to risks of any form of supply disruption.
Although different in structure and with no tightness emerging, gas markets seem to closely follow oil market developments. In Europe, this is occurring with a lag of some months, while in the US the gas price is following the oil price much faster. In Europe, the close relationship in movements is mainly due to long-term supplier-customer relations, where prices fixed in long-term contracts often are indexed to oil prices or price developments of oil products. At times of rising oil prices, this relationship is strengthened by a certain lack of competition on the European and some national markets, despite recent liberalisation efforts. In the US, gas prices are following oil prices even more closely, especially as regards the level: While in the US the oil price increase is matched in total by equivalent gas price increases, the price for imported gas in Europe has - although it followed the price directions - remained significantly below the equivalent price for oil.
As regards the market outlook, prospects are far from clear. While all long-term projections foresee a significant decline to $30 to $40 per barrel in oil prices from recent levels in their central scenarios, the actual declines are hardly predictable. Thus, long-term projections in form of scenarios should rather be used for describing and understanding the mechanisms and key drivers of price developments than be interpreted as forecasts. With respect to the short-term outlook, price projections are – as is also the case for the Commission forecasts – based on information provided by futures markets, themselves, however, having only little predictive value.
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1.At present, several initiatives are ongoing both to improve the market transparency for oil
and oil products and to improve the dialogue between producer and consumer countries so as to make short-term price developments more predictable and to better match supply
and demand developments in the longer run.
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1.O IL PRICE DEVELOPMENTS AND OUTLOOK
1.1 Recent developments
During autumn, oil prices have slowly fallen from the peak levels recorded in the immediate aftermath of hurricane Katrina. The price of Brent crude oil peaked close to 55€/barrel ($68) by the very end of August. The oil
price averaged close to €52/barrel Graph 1: Oil prices (Brent) in US$ and €
($64) in August and September,
while it came down to an average 80
of €49.5/barrel ($59.5) in October. 70 Brent, $/bbl
The average for the first half of 60 Brent, €/bbl 50
November is even lower at 40
€48/barrel ($57). Hence, the prices 30 have come down since the 20 beginning of the autumn, but from 10 record levels. The average price for 0
October is still 50% higher Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006
compared to the end of 2004, while Source: Ecowin
it has doubled since the end of
2003. $/bbl Graph 2: Brent forward curves, ICE London 70
The prices on oil future markets have also come down in parallel 65 with spot prices. At present, future 30/08/2005 oil prices point towards slightly 60 15/09/2005 higher oil prices than at present for 14/10/2005 about the next 2 1/2 years, while 55 15/11/2005 the long-dated contracts ending in
2010 point at prices slightly below 50 the current level. Long term future 0 6 12 18 24 30 prices have become more sensitive Source: Ecowin Months from delivery, 0 = spot price to spot price movements, which indicates an increased uncertainty also about long-term oil price expectations.
Demand growth still appears to be rather robust even if it has eased considerably compared to the record levels in 2004. It has also been somewhat lower than expected during the fall, partly due to the unusual warm weather in September and October in Europe and Japan. The International Energy Agency (IEA) now forecasts, in its November report, world demand growth at 1.5% in 2005 and 2% in 2006, down from 3.7% in 2004. Note that this demand growth now takes place at a higher level, and can still be considered as substantial in historical terms.
The growth of oil supply has managed to keep pace with demand growth. The loss of Gulf of Mexico production, which was still down in October by 1.1 mb/d compared to normal levels, has been compensated by increased non-OECD and OPEC production. Overall, the forecasted production for the non-OPEC is expected to remain rather stable in 2005 compared to 2004, but a larger production increase of 1.3 mb/d is forecasted for 2006. So far in 2005, OPEC has managed to increase its crude production by 1 mb/d. However, the IEA expects the “call on OPEC production and an increased production of natural gas liquids.
The fact that the market is rather well supplied is also confirmed by stock movements. The OECD total industry oil stocks remained flat in September. More recent data from the US indicates that their total crude oil stock has started to be rebuilt since the draws in September and it is now back at the levels before stock releases following hurricane Katrina. The gasoline and distillate stocks have also started to be rebuilt and are now both within their average range.
High prices, and expectations for prices to remain high, are still a result of a tight market and concerns about the future demand-supply balance. While demand growth has slowed somewhat and supplies appear to be sufficient at present, the spare capacity remains low. The OPEC spare capacity was estimated at 2.15 mb/d in October (1.22 excluding Iraq, Nigeria, Venezuela, and Indonesia). Even if it has improved since the lowest levels recorded in the fall of 2004, it is still low historically. This low level of extra capacity leaves the market vulnerable to any form of supply disruption. As a consequence the price remains very volatile, and sensitive to any risk of potential impacts on production of hurricanes, political instability or terrorist activities in the oil-producing countries. Typically, high oil prices induce investments in new oil production, but it also takes several years before new projects come on stream. Hence, the constrained supply situation, with low spare capacity, is likely to persist for some time, although some additional supply capacity triggered by the oil price hike in 1999-2000 is now coming on stream.
The market for refined products has become tight due to capacity constraints also in this part of the oil sector. This became evident in the aftermath of hurricane Katrina. The shut down of refinery capacity in the Gulf of Mexico drove petrol prices very high in the US. This has had effects on the world market, as increased European and Pacific export of refined products, partly as a result of stock releases, covered the shortfall in the US. The result was increased prices world-wide on refined products. In the last two months, the prices on refined products have slowly eased as the shut-down refining capacity has started to come back on stream.
In the present situation, it is difficult to make forecasts for future oil prices. In the recent Autumn Forecast, the Commission - based on developments on future markets at the time of preparing its forecast - assumed that oil prices will remain at an elevated level throughout the forecasting period ending in 2007. The average yearly price of a barrel of Brent is assumed to be averaging $55.0 (€44) in 2005, increasing to $61.4 (€50.7) in 2006, before receding slightly to $60.3 (€49.4) in 2007. This implies a significant upward revision of the oil price assumptions compared to the previous Spring forecast.
1.1 Medium- and long-term projections
The Commission Services (DG Transport and Energy) regularly make long-term projections for the EU energy system. The last one, titled “European Energy and Transport–Scenarios on key drivers”, was published in September 2004. The next one is currently being finalised and is planned to be made available in the beginning of 2006.
IEA published recently, on November 7 th , its new edition of the World energy outlook
(WEO), which includes medium- to long-term price projections. This issue of the WEO makes an in-depth analysis of the oil and gas resources in the Middle East and North Africa,
1 The “call on OPEC” is the difference between total world demand and non-OPEC supply, adjusted for the
OPEC production of natural gas liquids.
which will be crucial for meeting the future world energy demand. The WEO reference scenario predicts that energy demand in 2030 will be 50% higher than today, as a result of an average annual growth rate of 1.6%. Oil and natural gas is projected to account for 60% of this increase.
In this scenario, the IEA crude oil import price is assumed to ease to $35/barrel (in 2004$) in 2010 as new production and refining capacity come on stream. A gradual rise to $37 in 2020 and $39 in 2030 is projected for the remaining period. The global reserves are estimated to be sufficient to meet this demand, but substantial investments are needed in order to have sufficient capacity. Cumulative energy-sector investment needs are estimated at about $17 trillion (2004$) over the 2004-2030 period. Financing these investments is one of the main challenges for the future.
The price assumption in this year’s outlook has been revised upwards compared to the 2004 report, the latter projected an oil price of $22/barrel (2000$) in 2010, reaching $29 by 2030. The higher price projection in the 2005 report is attributed to a shift in producing countries’ price objectives and an analysis that suggests that the oil market will be tighter in the initial projection periods than expected earlier.
The WEO also looks at two alternative scenarios. The first analysis covers a situation with a major shortfall of investment in upstream oil production capacity in the Middle East and North Africa region. The reference scenario assumes a doubling of the level of annual upstream investments in this region. It is not certain that this amount of investment will actually materialise, as local governments might want to develop capacity more slowly and/or capital shortage could prevent investments. Thus, the assumption applied in this scenario is that the level of upstream investment in oil remains constant as a share of GDP, based on an average for the last ten years. The end result would be lower production in this region and its share of total oil production would drop to 33% in 2030 from today’s 35%. As a result, the oil price will also increase more over time, and is estimated to be $52 in 2030, $13 higher than in the reference scenario.
The second scenario is an alternative policy scenario. This scenario assumes that energy consuming countries implement the new energy policies of promoting energy efficiency and moving away from fossil fuels. The result would be a lower demand growth also for oil and gas, now estimated at 1.2% annually. In this scenario, oil would nevertheless remain the leading energy source, namely as the share of coal would fall. The oil price would also be lower. The average oil price is estimated at $33 in 2030 in this scenario, 15% or $6 lower than in the reference scenario. However, the consumer would have to invest an additional $1.1 trillion in energy efficient technology in this scenario, which corresponds to about $15 per saved barrel of oil.
In conclusion, the WEO points towards two main issues for the future. One is the need for investments in the energy sector, in particular in the Middle East and North Africa region, and the corresponding risk of higher prices as a result of too little investment. The other is the importance of energy policy, in particular efforts to improve energy efficiency and to reduce the use of fossil fuels, which could eventually lower energy demand and, hence, put downward pressure on the oil price.
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2.R EPORT ON DIALOGUES WITH OIL PRODUCING COUNTRIES
2.1 Introduction
One of the key issues that the Commission identified in its 2000 Green Paper “Towards a
European Strategy for the Security of Energy Supply” 2 was the management of EU’s growing
dependency on external energy supplies. Enhancing relations with the external producer countries and strengthening the supply networks were identified as the key policy responses.
In May 2003, the Commission published a Communication on the development of energy
policy for the enlarged European Union, its neighbours and partner countries 3 . This
Communication recognised that neighbouring countries both supply a major and growing part of the EU’s requirements of natural gas and oil and ensure the transit of primary energy to the EU. Furthermore, it was recognised that these countries will progressively become important players in the European Union’s internal gas and electricity market. It established four policy objectives, namely:
– Enhance the security of energy supplies of the European continent, – Strengthen the Internal Energy Market of the enlarged European Union, – Support the modernisation of energy systems in our partner countries, and – Facilitate the realisation of major new energy infrastructure projects.
In this context, a number of policy initiatives have been launched in the field of external energy relations.
2.1 EU-Russia Energy Dialogue
Recognising the importance of Russia as a key energy partner, the EU-Russia Energy Dialogue was launched at the EU-Russia Summit of October 2000 in Paris. It enabled progress to be made in the definition and arrangements for a European Union-Russia Energy Partnership. The EU-Russia Summit of October 2001 then agreed the direction for developing the energy dialogue by identifying a non-exhaustive number of important, practical, short and medium terms issues to be addressed. These include:
− improving the legal basis for energy production and transport in Russia, − a quantitative and qualitative assessment of energy transport networks where necessary,
− the recognition of certain new energy infrastructures projects as being of “common interest”,
− recognition of the important role of long-term contracts and energy markets for ensuring energy security,
− the creation of an EU-Russia Energy Technology Centre and − pilot projects in rational energy use and savings in two Russian regions.
Over the longer term a number of other issues will be analysed further, including an investment support scheme to mitigate non-commercial risks, trade in electricity subject to
2 Towards a European Strategy for the Security of Energy Supply. COM(2000) 769 final i of 29.11.2000.
3 The Development of Energy Policy for the Enlarged EU, its neighbours and partner countries. COM(2003)262 i
final of 13.05.2003. This Communication also built on Wider Europe – Neighbourhood : A New Framework for Relations with our Eastern and Southern Neighbours. COM(2003) 104 final i of 11.03.2003.
certain preconditions and the prospects offered by the flexible mechanisms under the Kyoto Protocol.
Notable successes of the dialogue include helping to build the confidence of EU energy companies to invest in Russia and allaying the concerns of Russia related to the construction of the EU’s Internal Energy Market. The dialogue has also confirmed the importance of longterm natural gas supply contracts which currently remain very important as collateral to finance the huge investment needs in the gas sector and it has resolved a number of the disputes relating to the issue of territorial restriction provisions which exist in some long-term gas contracts. A number of important “common interest” energy infrastructure projects have been identified and discussions on the interconnections between the Russian electricity system and that of the continental EU have been facilitated. The new Technology Centre in Moscow will also enhance co-operation between the EU and Russia on new energy technologies.
In addition, following a mandate from the Council, the Commission has begun negotiations with the Russian Federation on trade in nuclear materials. After an intensive exchange of views, Russia has now set energy efficiency as one of its energy policy priorities and has expressed an interest in the EU’s experience in energy savings. Pilot projects on energy efficiency are being jointly planned in three Russian regions: Astrakhan, Archangelsk and Kaliningrad.
Four thematic groups, dealing respectively with investments, infrastructure, energy efficiency and trade, have been established consisting of representatives from the EU Member States, the Russian authorities, the Commission and the EU and Russian energy industries. These groups will be meeting for a third time in late November/early December with the objective of finalising joint reports by the end of this year.
2.2 EU-Norway
Norway is a member of the European Economic Area (EEA) and as such most of the EU acquis also applies to Norway, including the legislation related to the internal energy market. Approximately 80% of Norwegian oil production is sold in the EEA market, and almost all of the Norwegian gas production is delivered through five pipelines to Europe.
The EU-Norway Energy Dialogue was successfully started in the spring of 2002. It aims at securing continued exports of oil and gas to the EU and to co-ordinate energy policies in a wider sense, including on technological issues. In addition to regular meetings at working level, the dialogue involves annual high-level meetings. Most recently, Commissioner
Piebalgs and the Norwegian Minister, Thorhild Widvey, met in Oslo on 6 th July. On that
occasion, key themes included energy efficiency, renewable energy, and security of energy supply, including exploration and production activities in the Arctic area. The two sides also discussed technological developments in the energy sector, including carbon sequestration, and relations with other energy producing countries.
2.3 EU-OPEC Dialogue
As the result of an initiative of the Dutch Presidency in the second half of 2004 to enhance the producer-consumer dialogues, a high-level EU-OPEC Dialogue was launched in June 2005. The aim is to co-operate towards achieving the common goals of:
− more stable international oil markets and prices, − an attractive investment climate, − improving market transparency, including by reducing speculation, − improving market analysis and forecasting, and − technological and international cooperation (including in the non-oil sectors).
The first Ministerial meeting took place on 9 th nd June 2005 and a second is planned for 2
December 2005. In addition, a technical Round Table on Oil Market Developments will
take place on 21 st November 2005 involving experts from the EU Member States, the
OPEC Member countries, the OPEC Secretariat and the Commission.
2.4 EU-Gulf Cooperation Council energy dialogue
This dialogue was launched in the early 1990's within the framework of the cooperation agreement between the EU and the Cooperation Council for the Arab States of the Gulf (Council Decision 89/147/EEC i). Annual meetings at Ministerial and high level officials (Joint cooperation Committee) examine the relations between the two sides. An Energy Experts Group at the level of Directors General or Directors meets every 2 years and examines issues related with oil, gas, rational use of energy and renewable energy sources, as well as the protection of the environment. Several jointly financed studies and events were launched during the latest years. It is expected that this cooperation will be upgraded following the imminent agreement on a Free Trade Agreement between the two regions.
2.5 Other initiatives
A Memorandum of Understanding on energy is about to be signed in December between EU and Ukraine. It will provide a comprehensive framework for energy co-operation between the EU and Ukraine by establishing roadmaps for key energy issues, including, amongst others, nuclear safety, the integration of electricity and gas markets, enhancing the security of energy supplies and the transit of hydrocarbons.
A Ministerial Conference on Energy was held in Baku in November 2004 in which the participants agreed to support the gradual development of regional energy markets in the Caspian Littoral States (Caspian Basin) and their neighbouring countries. This will facilitate a future gradual integration between the respective energy markets and the EU market. It was also agreed to work on enhancing the attraction of funding for new infrastructure and to embark on energy efficiency policies and programmes. Four working groups consisting of the countries involved and the European Commission have been established for this work and another Ministerial Conference will be held in 2006 to review the progress.
The gradual creation of a Euro-Mediterranean energy market is also an objective for the
European Union and the 12 Mediterranean Partners 4 . In this context, a number of significant
sub-regional projects are being pursued, such as the progressive integration of Maghreb countries electricity market with the EU electricity market, the integration of gas markets in the Mashreq region, energy projects of common interest to Israel and the Palestinian Authority, and the construction of Medgaz and Arab Gas Pipeline.
4 The 12 Mediterranean Partners are: Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco,
Palestinian Authority, Syria, Tunisia and Turkey. Libya did not accept the conditions and principles of the partnership and, together with Mauritania, has the status of observer.
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3.O IL MARKET DATA ISSUES
3.1 Introduction
In periods of high price volatility, such as the one experienced at the end of the 1990s and at present, increased attention is paid to the problem of the adequacy of market information. Insufficient transparency or reliability of data on the main variables can increase price volatility. The availability of good quality statistics on demand, production and stocks is therefore crucial, and can be enhanced through international cooperation.
The current tight oil market has in particular increased the interest in oil stocks statistics to monitor the tightness in the oil market. The data published on oil stock is closely followed by the oil market, thereby having a significant impact on spot prices and future/forward prices.
The available data on variables such as production capacities and future reserves, which are also essential for the determination of current and future prices, are intrinsically less accurate and reliable. To this technical uncertainty should be added the fact that these also act as strategic variables for the producing countries. The international cooperation within the Joint Oil Data Initiative does not cover these issues, for which there is scope for further work at the international level.
3.2 The Joint Oil Data Initiative
The “joint oil data initiative” (JODI) was launched in 2001, as concerns were expressed by some observers that part of the volatility was caused by inadequate and opaque statistics. This initiative also aimed at improving data provision by building on progress in information technologies.
In response to a call from the Seventh International Energy Forum in 2000, the initiative was launched in June 2001 by six major regional and international organizations representing producers and consumers: Asian Pacific Energy Center (APEC), Eurostat, IEA-OECD, OPEC, the Latin American Energy Organization (OLADE), and the UN Statistics Department. It was first launched as a six-month data reporting exercise aiming at assessing the quantity, quality, and timeliness of basic monthly oil data (on production, demand, imports, exports and stocks) through a questionnaire sent to a large number of countries. The results were reviewed in November 2001 and the exercise was extended as it appeared that the initiative had given many countries a chance to improve their statistical systems. The six organizations involved were encouraged to continue and strengthen their cooperation on energy data.
In 2002, the parties of the initiative transferred the exercise into a permanent reporting mechanism. It was also decided to focus the work on improving “participation, timeliness, completeness, quality and accessibility of data.” The objective became to assemble the information and to develop the World JODI database. This database has now been released on
November 19 th at the opening of the new premises of the International Energy Forum
Secretariat in Riyadh. This date might be considered somewhat early, as not all data for all the flows, products and countries will be available or of good quality.
The JODI database covers in total 42 variables, and as such it may appear limited. However, the main objective is to achieve world-wide coverage, which is the challenge. The database currently includes 92 countries. Priority has been given to improve and secure the quality of the data of the 30 largest oil consumer and producer countries, accounting in total for about 90% of the consumption and production. It is also claimed that, despite the fact that the database is work in progress, the data for these countries are of reasonable quality in terms of timeliness, coverage and reliability. The database covers seven products, which are crude oil, liquefied petroleum gas, gasoline, kerosene, diesel oil, fuel oil and total oil. Four flow variables are included: production, demand, closing stock levels and stock changes. The available data should be monthly data covering the period from January 2002 up until one month old.
The work to improve the database will continue, and the organisations will now continue to work to increase the coverage of the countries, to reduce submission delays, and to further improve data quality. Other flow variables will also be made public through the database in due time, notably data on refinery intake, refinery output, exports and imports. These variables are already part of the JODI questionnaire.
3.3 Data on European oil stocks
European data sources
The tight market conditions on the oil market have, as mentioned above, raised the interest in data on oil stocks. There are two main sources for data on European oil stocks: Euroilstock
and the publication from the Energy and Transport DG of the European Commission. 5
Euroilstock is a foundation which commercialises its data through Reuters while the Commission disseminates its data freely. Using as a basis the same raw data, both publications provide aggregated monthly stocks data which includes both governmental and commercial (industry) stocks. Both publications also present stock data on finished gasoline products, diesel and fuels oils.
Euroilstock publish the physical level of oil stocks in Europe with a commercial purpose. The Commission data on oil stocks, on the other hand, is primarily used to verify the compliance of EU Member States with their obligation to keep a minimum level of stocks pursuant the Oil Stocks Directive (68/414/EEC). These different objectives bring distinct approaches on the scope of countries covered by the data, the criteria selected to present the data on country level and the very nature of the statistics published. These differences should be spelled out to avoid misinterpretations:
− Euroilstock has a narrower geographical coverage of EU countries than EC data as
it contains monthly data on the estimated primary stocks 6 in the EU15 plus
Norway. The Commission data refers to oil stocks belonging to all EU Member
States 7 and is currently presented in two groups: EU15 + Hungary and the other
nine new Member States. This distinction reflects the Member States for which the Stocks Directive is fully applicable, and a group of Member States which are
currently enjoying a transitional period before the full application of the directive.
5 Euroilstock publishes an estimation of the monthly level of oil stocks just seven working-days after the end of
the month (one-month old data). Note that although Eurostat and IEA also publish monthly data on European oil stocks, this is two-months old data. Further, Euroilstock’s publication uses IEA and Eurostat data for building its historical series.
6 Primary stocks are stocks held in refineries, natural gas processing plants, oil terminals and entrepots, pipelines
and stocks held on board of incoming vessels in ports or at mooring. They exclude power station stocks. They are on a national territory basis including stocks within the national boundaries of the country regardless of ownership.
7 Note that Euroilstock presents the data of Finland, Sweden and Norway aggregated under one common heading
as well as the data on Belgium and Luxembourg.
− Euroilstock’s country level data refers to stocks within the national boundaries of the country regardless of the ownership, while the Commission data on country level indicates the amount of stocks owned by a specific country (including stocks abroad).
− Euroilstock data reflects the physical amount of existing stocks of crude oil, three categories of petroleum products (gasoline, middle distillates and fuel oils) and naphtha. The Commission data, on the other hand, refers to the notional amount of stocks of the same three categories of petroleum products (gasoline, middle distillates and fuel oils) for which MS have the obligation to keep stocks pursuant to the Stocks Directive. This data reflects the physical stocks of fuel products, but it is also increased with a hypothetic refined yield of the country’s existing crude oil stocks (calculated according to the rules laid down in the Directive).
A comparison with US data on oil stocks
Data on US oil stocks is published on a weekly and monthly basis by the Energy Information Administration (EIA) of the US Department of Energy. US Data on stocks is freely accessible on the Department of Energy website. Data on US oil stocks is presented for the US as a whole and by five areas covering the country (East coast, Midwest, Gulf Coast, Rocky Mountains and West Coast). With respect to the different data by product, the EIA publishes data on the aggregated amount on crude oil plus petroleum products. This is accompanied by a detailed breakdown which identifies the crude oil stocks kept by US Strategic Petroleum Reserve (governmental stocks) and the main categories of petroleum products and blendings.
The later includes gasoline (conventional and reformulated), middle distillates 8 , jet fuel,
distillate fuel oil, residual fuel oils, propane, unfinished oils and other oils.
European Commission policy position
Data on oil stocks is currently considered as one of the best proxies for estimating the shortterm balance between supply and demand in the oil market thus having a significant impact on oil prices. A comparative analysis between data published on oil stocks in Europe and US reveals several shortcomings in the European data:
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1.European data is fragmented in two sources aiming at different purposes. This complicates the interpretation of data and hampers visibility.
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2.European data has a lower frequency and less detail (there is no distinction between governmental and industry crude oil stocks and there is a fewer number of petroleum products).
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3.Part of the European data (Euroilstock) is not freely accessible (distributed by Reuters).
The European Commission is reflecting on ways to improve this situation. Over the last year Commissioner Piebalgs has expressed his interest to increase the frequency and availability of data on stocks thereby recognising the added value of this data for increasing the transparency in the oil market. The publication of stocks data could become one of the important elements of the Energy Market Observation System to be created within the Commission Services. A feasibility study has already been launched to determine the technical details of such observatory mechanism.
8 Data also includes the commercial heating oil stored in the Northeast Heating Oil Reserve created by President
Clinton in 2000 to reduce the risks presented by heating oil shortages.
A NNEX :
G AS MARKET DEVELOPMENTS – AND THEIR LINK WITH OIL MARKETS
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1.Introduction
The structure of the gas market is very different compared to the oil market. The reliance on large infrastructure investments in pipelines is one explanation for the long-term relationships between the producer countries, the gas distributors or retailers and the customers. Most gas in Europe is traded on long-term contracts with durations of 5-20 years, with an average duration of around 9-10 years. These long-term contracts use different indices to determine the price. The spot market, on the other hand, covers only a limited share of the traded volume. Furthermore, the spot markets in Europe have not been operational for very long and are not yet very liquid. One exception is the UK market, which is the oldest and which is functioning rather well.
Despite its flaws, the spot prices provide a good indication on the trends in the market. This is also true for the financial market on future contracts, which covers short as well as rather long future contracts. Border import prices are also recorded regularly, and are for example quoted in the “Quarterly Review of European Electricity and Gas Prices” of the Commission’s Transport and Energy DG. The International Energy Agency (IEA) also publishes data on import prices to different European countries on a monthly basis. Eurostat publishes price data every 6-month for different end-user categories. It is necessary to study a mix of these prices to get a good picture of price developments in the EU.
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2.Demand for gas
The share of natural gas in the total consumption of energy differs widely between Member States. The main determinant factors are the access to supply and the development of the gas distribution network. On average, gas accounts for 23% of the total energy consumption in the EU25 (see graph 1). The figure is somewhat less for the New Member States. In relation to 1990, it can be observed that the share of natural gas in total gross inland consumption has increased by around 5 percentage points.
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3.Supply for gas
Currently, around half of the natural gas consumed by Europe is actually produced within the
EU, with Germany, Italy, the UK, Denmark, and the Netherlands as the main producers. 9
However, this share is expected to fall both due to falling production but also due to an increased use of natural gas. It is estimated that the import share will be around 60% by 2010 and 80% by 2030.
9 Of these countries, Denmark and the Netherlands are net exporter of gas, while the UK was a net
exporter until recently.
Graph 1: Share of natural gas in total energy gross inland consumption, 1990 and 2003.
Natural gas share in total energy gross inland consumption (%)
50
40 1990 2003
30
20
10
0
5 E R E
G P
T F I P L
E E S
I
F R E S C Z D K D A T IE L U B E L T S K L V IT U K H U N L
E U
1
E U
2 5 S 1 0 S
N M
Source: Eurostat
The main supplier country outside the EU is Russia, which accounted for 44% of the gas imported to Europe in 2004. The figures for Norway and Algeria were 26% and 18% respectively, which means that these three countries together account for 88% of the EU import.
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4.Gas prices
The gas prices at different points in the supply-chain have increased quite considerably lately.
End-user prices
The development of the gas price for an average household and industry consumer is presented in graph 2. It can be observed that the prices have increased since late 1999 as they have followed the increase in oil prices, which started early in 1999. Prices then fell back by the end of 2001, but are now on the increase again. However, the dramatic increase in the oil price since the fall 2004 has not yet fully been integrated into the recorded consumer prices. Up until the first half of 2005 the gas price increases had been relatively modest. This can mainly be explained by the fact that gas prices in long term supply contracts are indexed to oil prices, which delay the price increase. Compared to the first half of 2004, the increase for private households amounted to 5%, while it was 15% for industrial users. In comparison, the average price for a barrel of Brent crude oil increased during the same period by 45%. Average industry prices are also lower than average household prices, and they currently amount to about 2/3 of the household price. However, prices generally vary with the consumed quantity and energy intensive industrial users would pay even less.
data).
€ / bbl Natural Gas Prices - EU15
60 (w ithout taxes)
50
40
30
20
10 ave. household cons (83.7 GJ) ave. industry cons (41,860 GJ)
0
1990 1995 2000 2005
Source: Eurostat
There is also a large variation in prices across Member States. This is demonstrated in graphs 3 and 4, which show the end-user prices for an average household and industry consumer for individual Member States. In both cases the price in the most expensive Member State is about three times higher than in the cheapest. It is evident that Estonia, Latvia and Lithuania exhibit very low prices, which can partly be explained by their proximity to Russia and their past relationship with Russia. However, the existing long-term contract is currently under discussion, as the supplier (Gazprom) wants to renegotiate the contracts.
Graph 3: Gas price in EU MS for an average household consumer, first half of 2005.
€ / bbl Gas prices - households - annual consumption < 83.7 GJ
(without taxes) 90
80
70
60
50
40
30
20
10
0 5
1 5 L V E E L T U L Z K H P C S K U L U S
I IE
B E A T
L E
F R N IT D E S S E P
T K
D F
I
E U
2
E U
Source: Eurostat
10 Natural gas is usually expressed in gigajoules(GJ) or millions of British thermal units (MBtu). The unit used in
this note is the energy content equal to one barrel of oil (barrel) in order to facilitate comparisons to the crude oil price.
Graph 4: Gas prices in EU MS for an average industrial consumer, first half of 2005.
€ / bbl Gas prices - industrial consumers (41,860 GJ)
(without taxes) 90
80
70
60
50
40
30
20
10
0
2 5 V L T N L E S S I T S K C Z P L B E H U F
I
U K P D K A T F R L U IE D E S E
E U E U
1 5 E E L
Source: Eurostat
Import prices
Import prices to various countries are published regularly by the IEA. This data shows that import prices have indeed increased since 1999(see graph 5). However, as the latest available data only cover the period up until the end of the first quarter 2005, the latest developments are not included.
Graph 5: Price of Brent oil (1 month forward) and average import price of natural gas to Europe, €/bbl.
€/bbl * Brent (1 month forward) and Natural Gas Import Prices
60
50 Brent
Natural Gas
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(*) Conversion factor : 1bbl = 5.8 Mbtu; monthly averages Source: IEA, OECD, Ecowin
Between the spring of 1999 and the spring of 2001, gas prices more than doubled before easing down a bit. Now, a new increase since late in 2004 can be observed, which is in line with rising oil prices. However, the average import price fell in March, possibly reflecting the easing oil price developments during the last months of 2004.
The price variation in the different countries is also quite significant. Particularly Ireland, which only imports from the UK, exhibits large price variations over time. In general the import price is higher than the European average for Spain, while the Netherlands and Finland exhibit lower than average prices. The prices in Germany and Belgium are close to the average price for Europe.
Spot prices
Spot and forward prices seem to be the only time series that can actually provide data on most recent developments. There are several different prices noted on commodity markets. The graph below (graph 6) shows the development on the 1 month forward market in London. An upward price trend can be observed, with a persistent price increase since 2000. However, the picture is blurred by seasonal variation each winter. The forward curve shows also an interesting development, as it indicates that the market expects further price increases in the near future, i.e. as winter is approaching. It also shows that the market expects the price to fall in the spring and be substantially lower during the next summer (see graph 7).
Figure 6: Gas prices, 1 month forward, London, Europe.
€/bbl Natural Gas IPE 1m, €/bbl
60 100 per. Mov. Avg. (Natural Gas IPE 1m, €/bbl)
Poly. (Natural Gas IPE 1m, €/bbl)
50
40
30
20
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Conversion : 1bbl = 5.8 MMBTU Source : Ecowin
Note: Two trendlines have been fitted to the time series. The first one is a moving average with a period of 100 days, while the other one is a third degree polynomial function.
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5.Specification of contracts
The existence of long-term contracts is a significant feature of the gas market. This feature has its origin in the large need of fixed infrastructure that is needed to connect suppliers and their clients. Hence, in order to undertake the necessary large investments the different parties want to secure long-term demand-supply relationships.
A gas contract normally covers 5-20 years. It is a rather standard contract that links the price of the gas to a price index. This index can be determined by a combination of factors, normally it has 3 main components:
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a)the retail price of a basket of commodities. This basket is normally dominated by the most commonly used substitute fuel, which will differ according to the Member State. In Germany it would be heating oil, while in Spain the most used alternative to gas would be propane. b) the production costs of a single or a basket of substitute fuels. This could be the same as under a, but could also be other oil products, e.g. petrol. c) the delivery cost. This factor will reflect the transit costs for the gas.
Graph 7: Natural Gas Forward Price Curves, London, autumn 2005.
70
60
50
40
30
13/09/2005
20 12/10/2005
10 07/11/2005
0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
The contract price is then a combination of these factors, either with equal shares or in different proportions. Normally the most important factor for determining the price is the retail price of the most commonly used substitute fuel, which most often would be heating oil. However, these indexes can look very different. Some German contracts are linked to a coal index, while others have been known to be linked to purchase power indices. Hence, other commodities might also be used, e.g. paper for the pulp and paper industry. However, recent findings indicate that only a limited number of contracts are linked to other indices than oil.
Gas prices are normally linked to the price of distillate oil products and not directly to the price of crude oil. Hence, this can be one explanation to why gas prices have increased lately
reflecting the recent tight supply situation in and high prices on refined products. 11
The link to the oil product prices can also be explained by the possibility to hedge these prices on the futures market. The market for oil futures is well developed, which makes it possible for both the supplier as well as the buyer of gas to hedge his price risk in the futures market when the gas price is linked to the oil price. Initially, gas was a bi-product of oil production, and this relation is also a part of the explanation for the current pricing mechanism. However, despite the fact that gas is a much more important product of its own today, it is still mainly priced in relation to oil products. There were moves by the industry to try to change this mechanism in the mid-1990s, when oil prices were low, but this price mechanism still exists.
11 However, the price of distilled oil products is very closely related to the price on crude oil, for example, fitting
a simple regression on data from 1988 until present shows that the crude oil price can explain 95% of the variation in the gasoline price (before taxes).
Gas is normally sold in long-term contracts with price formulas granting a revision of the price every 1 to 3 months. This means that the higher oil prices affect the gas market with a certain time-lag. The oil price spikes will also not be as evident as the price revisions will be based on past average prices.
The long-term contracts imply that there is a relationship between the price of crude oil and the imported gas price. This relationship was shown in graph 5. It is clear that the gas price follows the oil price but with a certain time lag (usually six to nine months). The graph also showed that the price of gas has gone up, but by less than the crude oil. When fitting a simple regression to the data, it is evident that oil prices lagged 6 months have the best explanatory value for the gas price. In effect, it can explain 91% of the variation.
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6.The Internal Market for gas 12
A first Gas Directive was adopted in June 1998 and it set the basic rules for the opening of the gas market to competition. A second Gas Directive was adopted in June 2003, which contained additional measures to liberalise this market. From July 1 2004, all non-household customers should be able to choose their supplier, while this right should be given to all households by July 1, 2007. The market-opening is underway in Member States, but there are
still numerous obstacles to competition. 13 The latest progress report points out that many
Member States have been late in implementing the second Directive, and others have still not done it. Furthermore, many Member States have chosen a minimalist approach and have not complemented the implementation of the Directive by additional measures aimed at making the market work in practice, given the national circumstances.
The best performance so far has taken place in markets which are close to a range of different gas resources. This includes the UK, Denmark and the Netherlands. Belgium and Ireland also have comparably mature competitive structures, while significant progress has been made lately in Italy and Spain. At least 30% of the large users have changed suppliers in these Member States. France is slowly approaching these levels, while the development in Austria and Germany is so far disappointing. The New Member States also have a number of problems which hinders competition to work.
Main obstacles to competition on the gas market are fair and flexible access to the network as well as lack of liquidity (both in terms of capacity and commodity). This requires, among other things, proper legal and functional unbundling of network operators from any supply interest, cost-reflective access charges, flexible conditions regarding entry and exit points and a requirement to make unused transmission capacity available to other operators. Current practices are not fully satisfactory in this area. Balancing and storage regimes are also sensitive issues, where there still remain problems.
The fact that it is often only one company that imports the gas to the market also limits competition. Even if there are several companies at the retail level, competition will be limited as they will all be supplied by the same company. The existence of long-term
12 Report on Progress in creating the Internal Gas and Electricity Market, (COM(2005)568 final i,
SEC(2005)1448; 15.11.2005), Annual Report on the Implementation of the Gas and Electricity Internal Market, (COM(2004)863 i; SEC(2004)1720 5.1.2005).
13 In June 2005, the Commission also launched an inquiry into competition in gas and electricity markets. It
responds to concerns by consumers and new market entrants about the development of the wholesale gas and electricity market. The main objective is to gather information in order to identify possible distortions to competition. The main results should be published in 2006. A first Energy sector inquiry – Issues paper were published by DG COMP on 15.11.2005.
reservations of transmission capacity and different charging structures of individual transmissions systems also hinder competition across national markets. A related problem is the lack of transparency regarding e.g. the capacity and congestion of the network, in particular for cross-border pipelines. The continuing lack of integration of national gas markets limits the degree of competition, and as a consequence, the incumbents manage to maintain their market positions. Less market segmentation among national lines would result in a more vigorous market, which is already evident in, for example, the North Sea area.
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7.The US market
The structure of the US market is different from the European market. The US has many small producers of gas with access to small gas fields. Hence, the market responds fairly easily to a price increase, as the suppliers simply drill more holes. The infrastructure is not so well integrated across the US, which results in different price zones. However, the market is
rather liquid with the Henry Hub 14 as the main trading point. The US has been self-sufficient
in natural gas, but this is currently changing. The result will be a rise in imports of liquified natural gas as the network is not well connected with other producer countries.
Graph 8: US natural gas spot price and 1 month forward price on WTI oil, €/bbl.
$/bbl * US Natural Gas (spot) and WTI (1 month fw)
90
80
70 WTI 60 Natural Gas
50
40
30
20
10
0
5 9 6 9 0 0 2 0 3 5 0 6
1 9
9 4
1 9
9
1 9 1 9
9 7 9 8
1 9 1 9
9
2 0 2 0
0 1
2 0
0
2 0 2 0
0 4
2 0
0
2 0
(*) 1bbl = 5.8 MBTU, monthly averages Source: Ecowin
Gas prices in the US are also related to oil prices, but this link appears less institutionalised than in Europe. The graph above shows that the gas price and oil price tend to move together. Actually, the development of the oil price can explain 73% of the variation in the gas price when a simple regression is fitted to the data. Furthermore, in U.S. the relationship appears to have been more close to a one-to-one relationship, i.e. the whole oil price increase has been matched by the same increase in gas prices.
Graph 9, below, shows developments on the 1 month forward market for gas in both London and New York. It shows that the gas price has been consistently higher in the US than in
14 Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile
Exchange. It is a point on the natural gas pipeline system in southern Louisiana, which offers shippers of gas access to markets in the Midwest, Northeast, Southeast and the Gulf Coast regions of the U.S.
Europe. This has also become more evident since 2001 and onwards. Finally, the graph also shows the effect of the hurricane Katrina on the US gas prices, as a very sharp increase can be observed in late 2005.
Graph 9: Gas price, 1 month forward, London (IPE) and New York (US Henry Hub), €/bbl
80 Natural Gas US HH 1m, €/bbl
70 Natural Gas IPE 1m, €/bbl
60
50
40
30
20
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Conversion : 1bbl = 5.8 MMBTU Source : Ecowin