Wholesale gas prices for this winter have fallen 40 per cent in eight months

Record low winter gas prices but spikes a possibility

British industry will enjoy record low wholesale gas prices this winter, though cold weather and supply issues could cause sudden spikes.

Prices have fallen 40 per cent in just eight months as low crude oil prices have triggered a surge in gas deliveries into Europe from Russia and Algeria whose piped supplies are oil-indexed, making them cheaper than the cost of gas traded on Europe's hub markets.

Normally traders buy gas for storage in the summer months, but with Russian gas prices expected to bottom out in September, many European utilities are holding off on refilling depleted stored gas reserves until the market hits rock bottom.

This raises the risk that storage facilities will not be refilled in time for winter, traders and analysts said, and the situation could be exacerbated if Ukraine boosts its gas purchases from north-west Europe to refill its own depleted storage sites before the official start of the winter gas season in October.

"Ukraine wants to have 19 bcm in storage by the end of the summer, but it doesn't have the money to buy that gas. The probable outcome is it will have around 14 bcm. They could probably get through most winters with that amount, but if it is cold they will struggle and look for gas from western Europe," said Trevor Sikorski, analyst at London-based consultancy Energy Aspects.

"We forecast the seasonal ramp in prices could go as high as 53p/therm (peak winter weather prices)," he said, from around 45p currently.

British and European gas storage levels are currently 53 per cent and 30 per cent below last year's levels, respectively, partly due to a heavy period of Norwegian maintenance restricting output this summer.

But the UK's increased carbon price floor is likely to discourage power producers from buying coal after the summer, which may increase their demand for gas to higher than normal levels.

The capping of gas production from Europe's biggest gas field at Groningen by Dutch officials could also tighten Britain's supply as it imports some gas from the Netherlands.

Traders say this was largely countered by Gazprom's decision to auction an additional 3.24 million cubic metres of gas for winter last week, but there is a possibility the Netherlands could cap production further in January.

"Spikes will happen but not necessarily because supply isn't enough to cover demand, but more that some people will be holding out to sell - as the (supply) flexibility will be concentrated in a few less hands," a trading analyst from a major European utility said.

New liquefied natural gas (LNG) supply coming on stream later this year in the Asia-Pacific region, is also unlikely to provide relief in the event of a spike in the European market this winter.

"There's a lot of demand standing in the way of all that new Australian and Indonesian supply reaching Europe," one LNG trader said, citing Indian and Middle Eastern buyers who are all concluding large purchase tenders.

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