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Now European forward gas starts to rally


With potentially record breaking cold weather set to continue in Europe and storage levels drained, it is perhaps no wonder that month-ahead gas prices are starting to rise.

Day-ahead prices have been strengthening since mid/late February and spiked in March where they have traded above our estimate for the raw oil-linked contract price for almost half the month, and remain well above the oil-linked price.

The risk of a gas shortage is now front page news, particularly after problems with the Interconnector caused UK day-ahead gas prices to hit USD 658/kcm (USD 18.6/mmbtu) in intra-day trade last Friday.

The threat that cold weather might extend into April has started to drive up the monthahead price, which has increased about 10% in the UK and around 8% at the Northern Continental European hubs over the last week or so, to trade within 15% of the oil-linked price.

The premium for ‘spot’ LNG to the Far East has halved since the beginning of March to around USD 70/kcm (USD 2/mmbtu) as prices to the Far East have slipped back and Europe has been forced to bid up for cargoes. The current European offer price for ‘spot’ LNG is around USD 500/kcm (USD 14.2/mmbtu), representing a premium of around 8% to the oil-linked contract price, we estimate.

It remains our view that LNG will generally find stronger markets outside of Europe, at least through 2015, thus raising the importance of pipeline gas to Europe as LNG availability to Europe declines. We expect this process will tend to keep the spot price of gas in Europe trading fairly close to the oil-linked price, which will represent the more readily available, and potentially cheaper marginal molecule relative to LNG, despite the pressure on European gas demand.

By the same token, the apparent pressure on gas availability and the pattern of spot gas trading closer to or above the oil-linked price is likely to reduce the scope for buyers to negotiate prices lower and lessen the net impact of increasing any spot component in pricing terms, we expect.

Colin Smith, Marc Jacouris
VTB Capital analyst

Europe, gas, oil, dollar

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