Wholesale UK gas prices should fall this summer as liquefied natural gas shipments rapidly replenish plentiful stocks, helping soften the blow of record high transport fuel prices for battered British business. After an unprecedented surge in gas costs last summer, Britain's gas market should return to its normal mid-year price lull, offering some short-term relief to big industrial users who buy on the wholesale market in an economy barely staggering out of recession.
Wholesale gas prices in Britain - a benchmark for global gas sales - surged in mid-March on fears that leading liquefied natural gas (LNG) buyer Japan would need more fuel to make up for nuclear plants shut by the March 11 tsunami. But fears of a resulting diminished supply to Europe have not been realised, and shipments from two huge new Qatari LNG plants, which together can produce 15.6 million tonnes a year (mtpa), have already swollen UK gas stocks to more than double the levels seen last year.
And despite a deal to sell Japan an extra 4 million tonnes of LNG from the new plants, Europe is still likely to get more LNG this summer than last, some analysts say. "They can send 4 million tonnes to Japan and still send more to Europe," leading independent LNG consultant Andrew Flower said, adding Japan's deal would probably only reduce the flood of Qatari LNG that would have otherwise have landed in Europe.
Influential US-based investment bank Goldman Sachs sparked a rally in UK gas prices this week when it said UK gas prices were likely to rise significantly in 2011 and 2012 due to reduced gas supply from Libya and Japan's new-found gas needs. But other analysts say there should be plenty to spare.
"We project that Europe will import 6.18 million metric tons in May, a year-over-year increase of 0.52 million tonnes or 9.1 percent," Waterborne LNG analysts said in their latest European LNG outlook. "That will be driven primarily by the ramp-up of Qatari volumes into the UK."
The US-based LNG specialists revised up their EU import forecasts following surprisingly high imports in the weeks since the tsunami and now expect European imports for April to be 20 percent above the year-ago level. Although there appear to be fewer tankers heading for north-west Europe than the long line of vessels queuing up in late March, a steady stream of deliveries continues.
Gas prices usually wilt in English summers when heating demand is low, and stocking-up for the next winter is one of the few price supports. In 2010, a shutdown for maintenance of about half of Qatar's LNG production trains provoked an unprecedented summer surge in prices on Europe's biggest gas market.
Qatari exporters plan some maintenance this year, but last summer's rally seems unlikely to be repeated, because Qatar has since increased production capacity by 25 percent, of which Japan bought only a quarter last week. UK gas prices for fuel delivered the next month surged about 15 percent from March 10 to March 16, when front-month contracts hit a 26-month high of 65.95 pence per therm ($10.85 per mmbtu). Prices have since fallen in a deluge of LNG from mostly Qatar and many other suppliers seeking to benefit from the UK price surge.
But prices for gas delivered in the UK market next month are still about 80 percent higher than a year ago and nearly double levels two years ago. Prices should fall as supply exceeds demand. Societe Generale said in an April 19 report that UK gas prices were "much too high", pointing to weak demand, plentiful spare export capacity in Russia and few LNG diversions to Japan.
Thanks also to a mild end to winter, Britain's biggest gas storage site has about 85 percent more gas than a year ago, while stocks at recently expanded LNG terminals are near record highs. So there is a lot less space to stash excess fuel over the next few months, unless it can be re-exported to Belgium via a pipeline, which has already been pumping record volumes this year as European buyers gobble up cheap gas.
"With summer round the corner, I believe prices should fall further," senior SocGen gas and LNG analyst Thierry Bros said on Tuesday, after UK gas prices fell about 5 percent in the week since the bank published its latest European gas price outlook. SocGen says that producers would have to slash production to maintain gas prices above 50 pence per therm ($8.29 per mmbtu) over the summer, and the French bank doubts they would dare behave like a cartel for fear that European politicians turn away from an increasingly gas-reliant energy strategy.
Analysts' estimates of the additional gas Japan will need this year vary from 5 bcm to nearly 15 bcm. Libya had exported about 10 bcm of gas a year to Italy and Spain before civil war shut its exports down in February. By comparison with these numbers, the International Energy Agency (IEA) forecast in November that the global oversupply of gas was set to rise above 200 billion cubic metres (bcm) in 2011 - largely because of a boom in North American shale gas production that has left many LNG sellers including Qatar scrambling for new buyers.
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