Azernews.Az

By Bloomberg

European natural gas prices under long-term contracts are poised to climb after oil rose from a five-year low, widening the gap to spot supplies, according to the Energy Contract Co., whose clients include Total SA and Statoil ASA.

While long-term oil-indexed gas will be at its closest to spot fuel this quarter, that gap is set to widen again thereafter, said Managing Director Niall Trimble, who has worked in the gas industry for more than 30 years. Brent crude rebounded 27 percent on ICE Futures Europe in London since reaching a five-year low in January.

European utilities from RWE AG to EON SE have long-term gas-supply contracts linked to oil and refined products and crude’s rebound will mean higher costs in six to nine months. Gas prices in the U.K., Europe’s most traded market, have been below long-term contract costs in the rest of Europe since 2006, the Energy Contract Co. said in its 2015 U.K. Gas Market Review.

“About the third quarter, you will probably find that the partially oil-related price is very close to the spot price,” said Trimble, who started his career at British Gas. “But progressively from next year onwards they start to diverge.”

European gas buyers tied to contracts with suppliers including Russia’s OAO Gazprom and Norway’s Statoil have sought to move to prices on traded hubs and away from oil after costs for the fuels diverged. Companies from EON SE to Eni SpA reviewed their contracts through talks or arbitration as they incurred losses buying gas at higher oil-linked prices.

Hub Prices

U.K. spot gas prices have been below long-term contracts in mainland Europe since the second quarter of 2006, with the discount peaking at 49.5 percent in 2009, according to the Energy Contract Co. The average difference over the past eight years was 16 pence a therm ($2.50 a million British thermal units) in the period, according to the report.

Long-term European gas contract prices will be about 23 euros a megawatt-hour (48 pence a therm) this year, while U.K. gas on the National Balancing Point hub is forecast at 20.30 euros to 22.40 euros a megawatt-hour, according to the International Center for Natural Gas Information, or Cedigaz. U.K. gas for next-month delivery fell 0.6 percent Tuesday to 43.54 pence a therm on ICE Futures Europe in London, down 16 percent from a year earlier.

Long-term gas prices will also be supported as oil products including diesel and fuel oil slid less than crude, Trimble said. Gasoil has dropped 40 percent on ICE in the past year, compared with Brent crude’s 46 percent decline.

“Don’t forget that it’s not crude that drives it, it’s products and products never came down as much as crude did,” he said.