Plummeting Dutch Gas Output Can't Stop European Price Slump

  • U.K. gas for winter delivery falls to lowest level since 2009
  • Gas storage is seen matching last year's record level

Plummeting natural gas production from Europe’s biggest natural gas field hasn’t stopped prices sliding to a six-year low at the start of the winter heating season.

Output in the Netherlands, the European Union’s biggest gas producer, slipped 58 percent from a year earlier in May to the lowest level since at least 1982 as extraction was capped at its Groningen field to prevent earthquakes, data from the nation’s statistics office show. Gas in the U.K., the region’s biggest market, is trading at a six-year low and may fall another 8 percent this winter amid near-record storage and more imports, Bloomberg New Energy Finance said.

Increased shipments through pipelines from Norway and Russia and by ship from Qatar have helped Europe refill its gas storage sites at the fastest rate since at least 2009. That means the market has taken lower output from the Netherlands, which supplied 14 percent of the European Union’s gas last year, “in its stride,” according to Barclays Plc.

“With Groningen production expected to be particularly low this fall, we expect imports to continue to be called upon,” BNEF analysts led by Meredith Annex said in a Sept. 28 research note. “Prices will remain depressed throughout the winter due to the combined effect of cheap oil-indexed Russian gas, weakening global LNG market fundamentals and high storage volumes.”

Dutch gas production
Dutch gas production

Winter natural gas in the U.K. rose 0.3 percent yesterday to expire at 42.51 pence per therm ($6.43 a million British thermal units) on the ICE Futures Europe Exchange, paring this year’s loss to 20 percent. That was the lowest price for the time of year since 2009 for a contract for the six months through March.

January gas will fall to about 40 pence a therm in a mild winter to stimulate demand in power generation, BNEF said. The contract fell 0.6 percent to a record 43.2 pence a therm by 8:42 a.m. in London. Temperatures across most of Europe will be near normal in October, rising to warmer than usual in November, according to MDA Weather Services.

Buyers in Europe are sourcing more fuel from Moscow-based Gazprom PJSC, the supplier of about a third of the continent’s gas, after crude’s collapse fully filtered into oil-linked contracts this quarter. An EU-brokered agreement Friday to ensure Russian gas supplies to Ukraine for the six-month period from Oct. 1 has reduced risks that westward-bound flows will be disrupted, as they were during similar disputes in 2006 and 2009. 

On top of that, lower demand for LNG in Asia has diverted cargoes to Europe, where spare capacity and liquid hubs can absorb cargoes searching for homes even with no additional demand. LNG imports into northwest Europe rose more than 60 percent year-to-date, and the arrival of more super-chilled fuel to global markets from Australia to the U.S. next year means the wave will continue, Barclays said in a Sept. 7 research note.

“We will see more LNG coming in,” Thierry Bros, a European gas analyst at Societe Generale SA, said by e-mail Sept. 28, adding that he doesn’t expect Russia and Norway to flood the region with fuel. The two nations, the biggest suppliers to Europe, will probably set a floor of $6 per million Btu, he said last week.

The EU’s 28 members pumped more than 51 billion cubic meters(1.8 trillion cubic feet) into storage since mid-April, the biggest jump in the period since at least 2009, data from lobby group Gas Infrastructure Europe show. They contained 74.6 billion cubic meters on Sept. 28, and are on course to match the record of almost 79 billion cubic meters reached last year by the end of the injection season, according to BNEF.

European Natural Gas Storage
European Natural Gas Storage

Russia will probably boost supplies to Europe by 7 percent this year to 158 billion cubic meters, close to the 2013 record of 161.5 billion cubic meters, according to Gazprom. Norway has supplied an average of 284 million cubic meters a day to Europe in the year to Sept. 28, up from 261 million a day in the same period of last year, according to data from Gassco AS.

“Everything at this moment suggests that we may see another winter of oversupplied gas,” Elchin Mammadov, a European utilities analyst at Bloomberg Intelligence, said by e-mail Sept. 28. “Even with reduced production from Groningen, the risk of a gas shortage will be minimal.”

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