European gas prices to keep on falling

Oil&Gas Materials 5 February 2015 18:01 (UTC +04:00)

Baku, Azerbaijan, Feb. 5

By Aygun Badalova - Trend:

European spot gas prices will continue to fall in 2015 given the plunge in oil prices, plentiful LNG supplies and high storage levels, Hussain Mehdi, Commodities Economist at at British economic research and consulting company Capital Economics believes.

"European gas prices have been under downward pressure since early 2014," Mehdi said in a report obtained by Trend.

In particular, the economist said the price of UK NBP (National Balancing Point) gas, one of the most liquid and actively traded gas market hubs in Europe, has been on a downward trend since early 2014.

NBP prices will continue to fall the next year with reaching 38 pence per therm by end-2015, from around 48 pence currently. (1 US dollar = 0.6126 British pound), according to the analysts' forecasts.

There are four key reasons to expect the fall in prices in 2015, he believes.

"First, high European stocks will continue to weigh on the market, barring an extended period of cold weather," Mehdi said.

The second reason is that LNG imports into Europe could pick up this year as Asian oil-indexed LNG prices soften, narrowing the previously high spread between the two markets.

"Third, lower oil prices will also hit European gas prices directly, as a large proportion of imports are still oil-indexed. Indeed, the gas price at the German border - a key market for Gazprom - could fall further in 2015 considering there is usually around a nine-month lag with the oil price," he said.

And, finally, lower gas prices shouldn't elicit a significant demand response, as could be expected in the oil market, according to the analyst.

Mehdi believes that the Ukrainian crisis remains an ongoing risk factor for the European prices.

"Gazprom cut supplies to Ukraine last year over payment disputes, before agreeing a temporary deal in late October. However, we expect that Russian export flows will be maintained, especially given Russia's worsening fiscal position," Mehdi said.

The European Commission in its last year's report on gas and electricity prices said that in the gas market, in addition to market concentration and price regulation, there is still often a supply constraint (with low numbers of suppliers and competition) and gas prices are still often indexed to oil prices.

Between 2008 and 2012 retail prices for gas and electricity in Europe have risen, while wholesale prices have declined significantly for electricity and remained stable for gas.

The report also stressed that in recent years the energy price gap between the EU and major economic partners has further increased: on average, EU industry gas prices are now three to four times more expensive than comparable US, Indian and Russian prices.

In the report the European Commission said that it believes it is important to maintain its commitment to completing the internal energy market in 2014 and further develop energy infrastructure.

The report also highlighted the importance for the EU to further develop its energy infrastructure, diversify energy suppliers and routes, and speak with a single voice in negotiations abroad, as well as implement the EU legislation in order to complete the internal energy market.