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Our market view - week 11

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Another spike in gas prices last week



UK gas prices jumped again last week on several outages and an upswing in demand due to cold weather. On Tuesday the day-ahead closed at 95.5 p/th. With little LNG available, very low storage levels and colder than normal weather, any form of supply issues is having a major impact on gas prices. Including the loss of 25 mcm/d Troll output through 1 April, Norwegian production is down by 36 mcm/d in March compared to last year. UK natural gas stocks fell by 19% last week, to a level 69% below last year. Volumes at the long-term Rough storage have dropped below 12% of capacity.
This is the first year of consistently colder than normal weather from November through March in over a decade. Due to high Asian gas prices, European LNG send-out has dropped to its lowest level since 2003. Forecasts of cold weather means weather-effected demand remains well above normal, which could cause new price spikes this week.
UK gas spot prices have been above oil-indexed contract prices in March, which has not happened often in the past five years. Prices should start to drop off in April on falling seasonal gas demand, but the need to start storing gas will support prices. Also, coal plant retirements over the summer will increase UK power sector gas demand.


UK gas storage levels, mcm (Source: ICIS Heren)


Oil futures reversed their upward course in mid-February on sluggish economic signals. Last week, the Brent price dropped below 110 USD/bbl.

The general outlook is that economic growth and oil demand is moderate, while supply is good. Weak economic growth and continued high oil prices undermine the likelihood of a strong recovery in oil demand growth in the near future. Non-OPEC output this year is expected to increase more than oil demand, which means OPEC will need to hold back production to balance the market and support prices. Still, there are challenges ahead. Much of the Middle East and North Africa region remains in turmoil. Civil war in Syria threatens to spread and the Iranian nuclear dispute is still unresolved. Continued political risk to supplies will provide a floor to oil prices.