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European hub gas price remains robust despite milder-than-usual winter


Europe has been experiencing a milder than usual winter so far, as measured in terms of heating degree days (HDDs). HDDs represent the sum of temperature differentials below 18°C (65°F) over a specified period, meaning that a higher HDD represents a colder spell of weather. Despite that, European gas hub prices have been fairly robust. Only recently have gas prices eased, with the UK’s NBP month-ahead gas price down 10% from its recent peak in early December to USD 10.9/mmbtu (USD 385/kcm). Forecasts call for a continuation of the mild winter, which is a likely cause for this recent price weakness.

Even following the recent drop in the European hub gas price, the discount to our estimated oil-linked pipeline gas price remains narrow at just 6%, compared with the average discount of 11% in 2013 and 24% over 2012. That suggests to us that a higher than usual proportion of gas demand in Europe is being satisfied by oil-linked pipeline gas, which is in line with reports that Gazprom’s exports in 2013 were higher than the expected and that January exports were also up YoY. These observations support our view that, despite weak European demand for gas, demand for Russian pipeline gas is to remain robust, as LNG spot cargoes are bid away from Europe to higher priced markets (see European Gas Market Outlook - Gas price forecast cut 9% but outlook for Russian gas remains robust, of 2 July). Indeed, even though north-east Asia has enjoyed a mild-to-normal winter thus far, the spot price of LNG cargoes to the region is some USD 18.4/mmbtu (USD 650/kcm). That is nearly a 70% premium over European hub gas prices and almost 60% above our estimate for oil-linked gas, which would be more than enough to direct non-contracted LNG cargoes away from Europe, we expect, while Latin American buyers are also in the market competing for cargoes.

Preliminary estimates of European gas consumption in 2013 have come in slightly below our forecast, showing a slight decline YoY after continued Eurozone weakness and displacement of gas by coal in power generation. For 2014, we forecast oil-linked pipeline gas to average USD 11.3/mmbtu (USD 399.kcm) and have the European hub price at USD 9.6/mmbtu (339/kcm).
Colin Smith, Marc Jacouris
VTB Capital analyst


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