Asian demand to pull up UK gas prices

UK gas prices will rise towards the end of the year to compete with a tightening liquefied natural gas (LNG) market in Asia, Bank of America Merrill Lynch said on Friday.

With European gas demand on the rise ahead of the winter heating season and Atlantic LNG cargoes being diverted towards Asia, where prices and demand are higher, Europe’s gas prices will have to rise in order to compete.

“4Q11 UK gas prices will likely have to rise above the current level of $11 million British thermal units (Btu)in order to compete with Japan and South Korea,” the bank said in a research note, adding Asian LNG prices for November delivery were now around $17 per million Btu, a $4-5 premium on Europe.

The global LNG market has tightened on the back of Japan ramping up imports following the nuclear disaster at Fukushima in March, and the market was further tightened through the upcoming maintenance of four Qatargas trains.

Also on Friday, Deutsche Bank said in a research note “the loss of imports to the UK in October, when Qatargas II Train 5 maintenance takes place, may not be softened by contributions from other Qatargas trains, and that the drop in imports will be closer to the full 28 million cubic metres per day.”

It added that this scenario could be prevented if the South Hook LNG terminal would absorb the full impact of all maintenance at any train in the Qatargas portfolio, in which case Deutsche Bank said it would “then expect to see fewer cargoes and lower imports through the end of September than we currently believe are scheduled.”

Deutsche Bank also said that so far, September had seen relatively little impact to the UK imports from maintenance expected to occur at Qatargas III Train 6.

“Although this maintenance may possibly be scheduled for the latter half of September, already cargo bookings are now known through 24 September, including three Q-Max vessels to the South Hook LNG terminal in the next eight days,” Deutsche said.

GLOBAL LNG PRICES COULD HIT 2008 LEVELS

Merrill Lynch said global LNG prices could rise above 2008 levels if Japan’s nuclear stress tests prevented reactors from reconnecting to the country’s power grid.

“In a worst case scenario where no approvals are granted following stress tests and all reactors scheduled for maintenance shut down, we estimate LNG demand growth in 2012 could reach 8.0 million tons,” the bank said.

“Should this occur, we see spot LNG prices next year rising to $25 million per Btu, similar levels as those seen in 2008, from $17 currently.”

But the report said currently 20 percent of Japan’s 49 gigawatt (GW) nuclear power generation capacity was online, and it expected five GW of nuclear capacity to return in 2012, resulting in LNG imports growing by 4.8 million tonnes to 82.6 million tonnes.

Reuters