Spot gas prices have been rising. The US Henry Hub gas price is only just off its high for the year at USD 121/kcm (USD 3.42/mmbtu), up almost 80% from its late April low. Although somewhat less remarked on, European hub gas prices have also been rising. Since the dip to USD 292kcm (USD 8.27/mmbtu) toward the end of July, European prices have risen more than 20% to around USD 360/kcm (USD 10.2/mmbtu) before winter has even got properly started.
Not only has the price been increasing, but the hub price discount to European oil-linked gas pricing has also been closing, tumbling from a 40% discount to around a 24% discount, we estimate.
The increase in price has come despite weak gas demand in Europe, which is down a further 2.6% YTD (to July) as a result of Europe’s economic difficulties and strong dark spreads resulting in coal displacing gas in power generation.
There are probably a number of factors which account for the increase in price, including problematic reliability in Norwegian supplies following 3Q12 maintenance. However, a key feature, we believe, is the reduction in European LNG imports which have fallen 12.4mmt (16.8bcm) YoY (to July), or over 30%, as cargo holders have sought higher priced markets elsewhere. This is serving to tighten up the market and make it more reliant on pipeline supply for its imports.
Since much of the LNG that comes to Europe is at the commercial preference of the sellers, rather than because it is contracted to buyers, we think that availability could well continue to tighten through the winter. We would not be surprised to see European hub prices trade above the oil linked price. Should that be the case, it could put a rather different complexion on the current debate around the desirability or otherwise of oil-linked pricing, we believe.