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Bloated gas storage


European gas prices continue to languish despite the onset of somewhat colder weather in the UK but still generally mild conditions in the rest of Europe. Despite a modest uptick today, over the last week UK NBP has eased another 2.5% to USD 313/mcm (USD 8.87/mmbtu) while Zeebrugge has also slipped 2.5% to USD 312/mcm (USD 8.83/mmbtu). Over the last month, European hub gas has fallen 9% and is now trading at a 36% discount to our estimate for generic oil-linked contract gas.

As discussed before, we believe that a key part of the problem is the much lower than expected demand occasioned by the so far mild winter and the weak economic activity which has cut into demand.

Besides the clearest evidence provided by price, the pressure is also visible in the European gas inventory data which currently stands at its highest ever level for this time of the year at 61.9bcm.

While the increase in physical stocks in part reflects an increase in storage capacity with Europe, a look at utilisation confirms that storage is above average and drawing down more slowly than normal.

We continue to suspect that the markets have been caught short by the weakness in demand and that physical buyers have yet to optimise their supplies fully to reflect that, despite some shortfall to expected delivery, Norwegian gas sales for October and November have undershot the NPD forecast by 26% and 9%, respectively.

The inventory situation suggests supplies need to fall further and/or demand pick up, otherwise hub prices look likely to remain under pressure. 

Colin Smith
VTB Capital analyst

Europe, gas

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