(Bloomberg) -- Higher European natural gas prices are here to stay.
At least that’s what traders were saying this week in Amsterdam at the Flame conference, the region’s biggest annual gas gathering. Rising prices for energy commodities led by oil and the need to refill depleted storage sites after the coldest winter since 2012 will see European gas consolidate its rare rally during the summer, when lower heating demand usually damps prices.
The increase is reversing trends seen just a few years ago, when a looming oversupply of the fuel, warmer winters and sluggish demand in power generation made it look like gas was only going to get cheaper and cheaper. While the role of crude in pricing European gas has diminished, it continues to be a key driver, according to RWE AG.
“We experienced a trend in the last two to three years where the prices were going one way -- down,” Simone Turri, head of origination for Central Europe and Italy at Zug, Switzerland-based trader MET International AG, said in an interview at Flame. “Now is the time for the prices to go one way -- up.”
Energy costs are rising across Europe, putting the region at an economic disadvantage to American industry, which has access to cheaper natural gas produced alongside oil. In Britain, front-month gas has risen 50 percent from a year ago to more than $7.50 a million British thermal units -- more than double the level of $2.80 prevailing in the U.S.
Brent crude has advanced to the highest level since end-2014 and prices for coal, which competes with gas in power generation, touched record levels. Next-month gas in the Netherlands has jumped 23 percent since the summer season started in April, the biggest gain for the period since 2010, as the storage needs meet lackluster imports of liquefied natural gas and curbs to output from the Dutch Groningen field.
“If there is no big fundamental change like more LNG imports or some production increase, I don’t see a big movement coming” as long as oil continues its trend, Turri said. “I will expect this situation to stay for a while.”
Norway and Russia, Europe’s two biggest foreign suppliers, are already pumping gas by pipelines in “exceptionally high” volumes, according to Andree Stracke, chief commercial officer at German utility RWE’s supply and trading unit. The need for more gas than usual to refill storage sites means prices “are pretty steep,” he said.
Equinor ASA sees the depleted inventories as the main reason behind the current gas price rally, Peder Bjorland, vice president for marketing and supply at the Norwegian energy giant formerly known as Statoil ASA, said in an interview.
While some see Europe’s LNG imports picking up from this summer, demand in Asia remains high. That means the “wave” of LNG debated for years is still not coming, Stracke said on a panel at Flame.
Spot volumes of the superchilled gas are coming to Europe because traders prefer their price, flexibility and diversion opportunities to offtaking volumes under long-term contracts, Turri said. That makes it hard to forecast imports into Europe, he said.
A cold snap propelled prompt gas prices to record levels in the U.K. and the Netherlands on March 1. The outlook for the coming heating season will depend on temperatures, said Turri.
“If the winter is particularly cold, the situation could be potentially worse than last year,” he said.
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