A cold March and April have altered the supply and demand balances for the European gas market in 2013, moving a system that was fairly comfortable at the start of the year to one that looks tight all the way through the rest of 2013. The prolonged winter, and the consequent impact on residential gas demand, was balanced largely through a high call on gas in storage, leaving the summer injection season with 10.8 bcm more to fill than at end-April last year. The biggest implication of this will be for summer 13 gas, with that incremental demand for injections into storage likely to keep summer prices from falling to far away from those oil-indexed gas prices.
Outside of the residential sector's need for heating, the outlook for end-user gas demand is resolutely bearish for most of the main gas markets on the continent, with the poor outlook for the region's economies in 2013 and 2014 likely to keep demand from the industrial and power sectors from growing. Gas into power, however, at these prices can look forward to further displacement as the march of renewables continues (we expect another 35 GW over 2013 and 2014 to be commissioned) and the much delayed German and Dutch coal plants start to come online (almost 12 GW over the next two years). The combination of the two will keep any total increases in gas demand limited in Europe over the next few years.
The one market that could buck this trend is the UK, which will see gas demand increased by the impacts of the Large Combustion Plant Directive (LCPD) that led to the closure of three coal plants of a combined 5.3 GW capacity, whose run-time in summer 2012 displaced around 1.3 bcm of potential gas demand from the system. Further, the introduction of the “carbon price floor” tax in the UK on fuels will fall harder on coal than gas plant – although given current fuel price relativities it is unlikely to do much to the power merit-order until April 2014.
With the outlook for production being largely flat for most producers and LNG likely to remain scarce, even if the weak demand-side means the call on Russian gas may not increase much over the coming two years. We expect to see something of a continuation of the trend of Norwegian and Dutch exports being more focused on north-western markets (particularly the UK), and Russian gas coming in to meet more central and southern market's needs.
Given the above, our price outlook is for NBP summer gas prices (Q2 13 and Q3 13) to average 65 p/therm (up 14% y/y), while 2014 prices will average 65 p/therm (down 4% y/y) across the entire year. Given the divergent demand patterns, we do expect to see the NBP – continental hub price spreads to be more consistently negative through the coming winter sessions.