A key development in European gas markets over the last two years has been the renegotiation of gas supply contracts into Europe. Here, the outcome of contractual disputes has been a securing of contract gas price reductions and, in some cases, a re-indexation of these contracts away from oil and oil products to hub gas. “Europe is experiencing a period of adjustment to more liberalised gas markets and is seeing its hubs grow. The basis risk that comes from buying gas linked to oil and selling it at prices reflective of gas hubs prices remains.” Barclays said in a report.
“While the contractual discounts won this year have helped to reduce the current basis differential, we believe it could widen in the next two years.” the Bank added.
This is because Barclays forecasts oil prices increasing by around 11% y/y in 2013, while the fundamentals of hub gas are likely to see only a moderate tightening, with 2013 prices forecast to increase by 8% y/y.
European gas market fundamentals in 2013 will likely see similar patterns to 2012, with forecast economic growth still modest, the call on LNG from Asia unlikely to show signs of abating; and relative fuel and CO2 prices probably at levels that will still keep gas demand in Europe at modest levels.
“While this will only marginally increase the call on piped gas in 2013, we forecast that the call on Russian gas exports will increase by 11 bcm in 2013 and another 13 bcm in 2014.” Barclays said.
Such an increased call on Russian exports would intensify the focus on how that supplier markets and prices its gas into the continent.
“We believe that 2013 could be a watershed year for Russian exporter, Gazprom, as its policy of only selling gas under oil-index comes under immense pressure. How Gazprom adapts to this changing commercial reality will determine where hub prices eventually settle.” Barclays added.
Barclays expects any change to Gazprom’s gas marketing to be gradual and would be done to maintain hub prices at levels no lower than current prices.
“Given all of these factors, we have maintained our UK NBP price forecasts published last quarter for 2013, at an average 65p/therm, and have introduced our 2014 forecast price at 67p/therm. We expect a global market easing in 2015, when added Australian and US LNG production are scheduled to come into the market, which could see a weakening in hub prices from those levels.” the Bank concluded.
Source: Barclays