European gas storage levels have been building since the trough in April but remain significantly short of normal storage levels. Gas in storage crept above the 30bcm mark in June but is below the bottom of the seasonal range and nearly 30% below the seasonal average.
A number of factors have led to the current situation. Low gas demand and a mild start to Winter in 2012 resulted in a strong build in gas storage levels in late 2012. Meanwhile, a bitter start to the Winter in Asia led to stronger than usual demand for LNG, reducing supply availability into Europe, while LNG demand from other parts of the world, notably South America, also cut supplies into Europe. The turn of the year saw prolonged cold spells in Northern Europe, with heating degree days close to 20% above the norm in some cities. That in turn led to a strong draw on gas supplies which were run down to the April low, at the bottom of the historical range, before supplies started building.
European gas demand remains low, in part due to the region’s economic slowdown but also due to the substitution of gas by coal in power generation. The collapse in the price of a European carbon emission allowance (EUA), robust European gas prices and cheap coal have made gas power generation uncompetitive relative to coal power generation.
European gas prices, however, remain robust, around the USD 350/kcm (USD 9.90/mmbtu) level despite the seasonal drop in demand and weakness in the US gas price which has now eased back down to USD 130/kcm (USD 3.70/mmbtu). It is clear that the European and US gas markets remain entirely disconnected.
In our view there is limited