Comment: A record year for European demand?
As 2009 drew to a close, the prospects of a good start to the decade for the European gas industry seemed slim. The economy of the EU-27 had shrunk by 4.2%, competitive European coal prices were limiting the role of gas and late snowfall seemed to have arrived too late to dispel a mild winter.
The prospect of a record year for European gas demand seemed far away. Six months later, it looks a safe bet.
While the European economy has turned a corner, and is projected to grow back to the level of the end of 2006 this year, this has not been the main driver behind the surge in demand.
A more material interlinked factor has been the surge in coal prices. Front-year European coal prices have risen substantially since December, while European (TTF) gas prices remained soft until May, pushing gas-fired power generation to nearly reach pre-recession levels.
The main factor, however, was the severity of the European winter between January and March, which had a dramatic effect on gas consumption.
"It is important to appreciate the impact that this very cold winter... has had on demand," said Howard Rogers, a consultant at Global Gas Perspective. "If the second half of the year is a normal year, then it may even be the highest European demand year so far, driven in no small part by the very cold first half."
According to government data, gas imports into Germany not only increased nearly 54% year-on-year between January and May, but also topped the equivalent 2008 levels.
Perversely, the record winter demand has also had the effect of driving up front-month European spot gas prices this summer to levels substantially higher than six months earlier.
One reason is related to the complexities of European utilities' oil-indexed contracts, which stipulate a set take-or-pay level for the year at around 10-5% below nameplate volume.
Due to the higher nominations from Russia during the winter months, German buyers were comfortably on course to meet their 85% minimum take-or-pay levels in Russian contracts by the end of March.
"By the time the buyers of oil-indexed gas in Europe got to April, I think they did their sums, and they could work out they actually nominate down from that point on quite comfortably on their oil-indexed contracts and backfill with as much spot gas as they could get," Rogers told ICIS Heren.
This has had a direct on Europe's chief repository of spot gas, the UK.
Since 10 April, flows from the UK to the continent via the Interconnector have remained robust, at an average of 42 million cubic metres/day.
However, the influence of oil-indexed prices on the NBP is finite - with the Interconnector's capacity not being the only limitation.
A bull run in NBP front-month prices that started in April seemed to fizzle out, after reaching a peak in early July, which reflected - in part - the end of Qatari maintenance resulting in higher LNG availability.
One uncertainty will be the behaviour of European utilities when the new contractual year with long-term suppliers begins in October. SE
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