Europe gas prices must rise to avoid winter squeeze

European natural gas prices need to rise by $2 per million British thermal units (mmBtu) in order to attract cargoes of liquefied natural gas (LNG) and avoid a winter supply squeeze, Goldman Sachs said on Thursday.

The bank said the rise was needed for European gas prices to become competitive with prices in Asia, where demand is booming.

European spot natural gas prices have remained range bound between $8.20 per mmBtu and $9.20 per mmBtu for the past three months, compared with around $13 per mmBtu in Asia.

Although Asian spot LNG prices have declined significantly from earlier this year, the price differential between Europe and Asia remained high enough to incentivize suppliers to send spot cargoes to Asia, Goldman Sachs said.

“Europe will need to attract (LNG) supplies to avoid a tight balance through the 2012/2013 winter. We believe northwest European gas prices will need to rise by approximately $2.00 per mmBtu in order to attract spot LNG supplies back to Europe from Asia,” the bank said in a research note.

“Northwest European gas inventories have tightened in spite of the relative weakness in natural gas demand. Without higher European prices to compete with Asia for LNG, the European market would lack enough supplies to balance itself and would move into a seasonally-adjusted deficit,” it added.

Earlier this week, Reuters research showed that Britain’s gas supplies are likely to be tight this winter, despite recession reducing demand, as the system has to rely on imports of LNG should there be pipeline outages or cold snaps.

Reuters