European gas prices to hit five-year low as LNG tankers boost supply

By ANNA SHIRYAEVSKAYA
Bloomberg

Europe’s natural gas prices are poised to end the winter heating season at a five-year low as a surge in cargoes of chilled fuel eases concern about supply disruptions.

The UK, the region’s biggest market, is scheduled to get 11 cargoes of liquefied natural gas (LNG) in March, the most for the month in at least three years, data compiled by Bloomberg show.

Slumping prices for other fuels such as oil also are keeping costs down, said Frank van Doorn, the head of gas trading at Vattenfall Energy Trading Netherlands NV in Amsterdam.

More LNG tankers are heading to Europe because of declining prices in Asia as demand weakens and regional supply expands. The cargoes are arriving just as the six-month heating season ends and users seek to refill inventories that have contracted to a two-year low. Buyers used stored fuel and delayed purchases because contract gas prices typically lag behind moves in crude by six to nine months and the rout in oil began in June.

“With the market on the verge of its seasonal change, further upward pressure would require additional supply outages or a stronger ramp up in crude prices,” Trevor Sikorski and Moses Rahnama, analysts at Energy Aspects, a London-based consultant, wrote in a report.

Benchmark UK gas futures have fallen 13% over the past year, according to prices on the ICE Futures Europe exchange. The contract rose 0.7% to 47.35 pence/therm ($7.04/MMBtu) by 9:16 a.m. London time, the lowest level for the time of year since 2010.

LNG Ships

LNG imports into Europe will rise 7 billion cubic meters (250 billion cubic feet) to 40 billion cubic meters this year, according to Energy Aspects. The increase is equal to a 10th of UK gas consumption in 2013, according to BP.

Storage facilities in the European Union were about 28% full on Tuesday, the lowest for this time of year since 2013, according to Brussels-based Gas Infrastructure Europe.

The lower gas prices are a result of the drop in “the whole energy complex” including oil and coal, Van Doorn said.

European coal prices fell to the lowest in more than seven years amid a worldwide glut of the fuel as governments from the US to China boosted efforts to shift away from the most- polluting energy source. Coal and gas compete in electricity generation.

Oil Decline

Brent declined to $45.19/bbl on Jan. 13, the lowest level since 2009, on ICE Futures Europe. It traded at $55.45/bbl on Wednesday, 48% less than a year ago. Oil is used to price gas under contracts with producers including Russia, which meets 30% of European demand.

The conflict in Ukraine, a key transit country for Russian exports to Europe, didn’t affect flows as in the winters of 2006 and 2009 after the former Soviet nations reached a temporary deal ensuring supplies. That accord ends March 31, after which the parties will discuss summer purchases.

Gas bought in summer, when prices are normally lower because of reduced demand, is usually injected into storage facilities for use in the next heating period, which runs from October through March.

Concerns that Rough, the UK’s biggest storage site, will have to limit its capacity because of a technical issue with wells have boosted gas for next winter. The contract gained for a fourth day on Wednesday, its longest rising streak in almost six weeks. Total available UK inventories may be reduced by about 14% because of the limits, according to Guillermo Baena, an analyst at Ener-g Procurement. Centrica will issue an update on Thursday.

“If confirmed, this is a significant reduction in UK flexibility and suggests the flows through IUK will need to increase in both the summer and winter, as the UK will need to rely more on accessing continental gas storage,” Energy Aspects said, referring to the reversible Interconnector pipeline between Zeebrugge, Belgium, and Bacton, England.

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