The forces of supply and demand for natural gas are pulling in opposite directions. Most demand indicators are flashing negative in the short-term, but the supply-side push remains strong for now. The big story on supply has been the recent giant offshore gas field discovery in Egypt. Our analysis discusses how upstream gas price reform has turned around fortunes within Egypt, a lesson for other countries with much-needed supply investments such as India, Mexico, and Iran.

Meanwhile North American shale continues to surprise on the upside. In a difficult price environment operators need to decide whether to spend scant resources on new fracs or instead go back and revisit older fracs with the latest technology. In our IHS PacWest study 'To Frac or Refrac: Prospects for Refracturing in the United States" we review nearly one million oil and gas well records to identify close to 600 horizontal refracturing events. Our analysis suggests that refracturing costs will drop if E&Ps can move toward a "manufacturing" approach.

Finding demand remains difficult, or at least finding good quality, high value demand. Our LNG team has recently focused on the significant drop in LNG contracting since its peak in 2013. After the initial rush of contracting in North America, buyers have pulled back, owing partially to the looming oversupply in the LNG market. These trends are building the competitive pressure on gas, and we have examined this squeeze in different geographies. In Europe the market space for thermal generation is under pressure from ongoing deployment of wind and solar power. By contrast in Brazil, natural gas is looking to find an optimal means to operate alongside the vagaries of Brazil's hydro power, which necessitates great flexibility from gas.

How does this tension between supply and demand get resolved? LNG supply is set to grow rapidly in the next few years, and once again Europe will act as the balancing point for the global market. We believe that the response of Europe's pipeline suppliers (particularly Russia) may change because of lower-than-expected demand in Europe and oversupply in Russia. Our analysis is one of the first to properly connect the much discussed oversupply in the global LNG market with the less well documented oversupply in Russia and the other CIS States. In this work we have elaborated on the consequent competitive scenarios for Europe, the global balancing point.

17 September 2015 by Michael Stoppard, Chief Strategist, Global Gas

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.