European gas consumption collapsed last year and there is no recovery in sight for this year, said Bank of America Merrill Lynch in a report “..it is remarkable how exceptionally weak European natural gas consumption still is today. Even taking into account last year’s weak base effects, European gas demand is not recovering. On our estimates, total European gas demand in the first six months of the year contracted by 4.3% YoY.” the Bank said.
Based on the 6 main countries—Germany, UK, Netherlands, France, Italy and Spain—gas consumption in Europe fell by 2.5% YoY in 1H12 and full year growth looks to be flat at best.
Natural gas demand in OECD Europe fell by 5% or 27 bcm in 2009, courtesy of the ‘Great Recession’ of 2008/09.
While gas demand subsequently improved in 2010, the recovery was slow, uneven and partly driven by an extremely cold winter. When oil prices rebounded strongly at the start of 2011, they squeezed European gas buyers on a large scale because of the embedded oil indexation of gas contracts, leaving major gas consumers over-contracted in volume terms.
As a result of high oil prices and adverse weather, gas consumption across OECD Europe collapsed by a significant 9% or 52 bcm in 2011 and now stands near 2002 levels.
Reasons behind the ailment
Weak economic activity, a mild winter and, perhaps most importantly, low domestic coal prices have sharply reduced the appetite for gas in Europe. While a return to more normal weather conditions this winter could boost demand growth on last year, an extremely weak economic outlook will likely offset
that.
“According to our European economists, Europe entered a recession in the second quarter.” the Bank noted.
Following a GDP contraction of 0.7% in 2012, the Bank sees another decline of 0.7% in the Eurozone next year, roughly 100 bps below where the consensus currently sits.
Given the tight link between industrial gas demand and general economic growth, it is hard to foresee any significant rebound of growth-sensitive industrial gas demand next year, the report said.
Source: BofAML