Goldman sees UK gas prices rising despite downturn

Mon Jun 11, 2012 10:14pm IST

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* UK NBP Q3 natural gas prices to rise 20 pct - Goldman

* Goldman says UK prices must rise to compete with Asia

* Other analysts expect prices to fall further

* Bullish view comes as oil, coal struggle at $100

By Henning Gloystein and Oleg Vukmanovic

LONDON, June 11 (Reuters) - Goldman Sachs bucked the trend of bearish natural gas price outlooks on Monday by issuing a recommendation to buy UK gas for delivery next quarter, saying it expected prices to rise by 20 percent from current levels.

Despite shedding over 25 percent since August 2011, analysts expect British gas for third-quarter delivery to drop further below its current 56 pence a therm price level as faltering economic growth curbs energy consumption.

But Goldman Sachs argues prices will rebound during the summer in order to lure supplies of liquefied natural gas (LNG) away from Asia, the world's most expensive market for the fuel.

"We expect (third quarter 2012) UK prices to increase by more than 14 pence per therm," tempting Atlantic Basin LNG suppliers to divert cargoes back to Europe and help refill depleted underground stockpiles before the winter, it said.

A 14-pence rise would mean the contract - which covers the low demand summer months of July, August and September - would have to rise by more than 20 percent from current levels and above prices for the peak Q1 2013 contract, which covers peak heating demand winter months.

Other banks contradict Goldman's view.

"The increase in Russian contracted volumes going forward given tepid demand in Europe is likely to weigh on gas prices until 2013, especially in the summer," Societe General gas analyst Thierry Bros said in a research note on Monday.

Barclays Capital also said on Monday "the return of the macro risks suggests a strong price recovery is not likely for a while."

CHEAP COAL DAMPENS GAS DEMAND

Collapsing coal and carbon prices have also driven a move from gas back to coal as the leading power plant fuel in the UK, the largest European market with switchable generation.

Coal-fired power generation in the UK rose 40 percent in the March-May period as gas saw its share drop by 30 percent.

Fuel switching may weigh on near-term gas prices, Deutsche Bank said, further isolating Goldman Sachs' investment guidance.

Its bullish view clashes not only with rival analysts but ignores wider slumps across oil, coal and power markets.

Crude oil struggled to stay above the $100 a barrel marker, while coal futures hit lows not seen since early 2009 at $96 per tonne, and German power marked its lowest point since late 2010.

Goldman Sachs also argued that UK traders would resort to competing for LNG cargoes with buyers in Asia, lifting prices in the UK and north-west Europe as a result.

Cargoes of spot LNG in Asia are currently changing hands at double European prices following the earthquake and tsunami in March 2011 that crippled Japan's nuclear industry.

But Societe General's Thierry Bros said in separate research that a major supply overhang of Russian gas available to Europe would prevent serious competition for LNG cargoes with Asia.

Goldman has stuck to its guns despite clear indications that events have derailed its earlier forecasts.

Last year it said fourth-quarter 2012 gas prices would rise on the back of economic recovery. Since then the contract has lost 4.3 percent of its value.

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