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Cheap oil will ensure lower gas prices too

By Shashank Shekhar

Low oil prices will keep the gas prices sublimed in the coming months, according to financial advisory company Merrill Lynch.

The Merrill Lynch report comes close on the heels of Russia resuming gas supplies to Europe.

The report said the contract gas prices in Europe are set to fall by over $3 per million British thermal units (mmBTU) due to what it termed a "a lagged impact of lower oil prices".

"On our estimates, contract gas prices in Europe are set to fall by over $3/mmBTU in the first quarter from an average of $15.80/mm BTU in December," the report said.

"European gas prices could come under downward pressure given that the lower economic activity is sharply reducing gas demand," it added.

"Plunging Brent crude oil prices from a record of $147/bbl to $ 46/ bbl at present, combined with the sharp economic contraction are heavily weighing on the European gas prices. Long-term natural gas-indexed prices linked to oil, such as Russian gas prices delivered into Germany will almost certainly come down in the coming months to reflect the collapse in oil prices," the financial advisory company said.

Nymex Henry Hub futures traded at $4.66/mmBTU yesterday while WTI light sweet crude for February delivery averaged at $41.10 a barrel.

Even though most of Europe saw a gas crisis recently and the Russian resumption of gas supplies of 350 mn cubic metres a day is much lower than the earlier levels, Merrill Lynch said that the European gas markets have been pushed into backwardation.

"As Russia cuts supplies to Ukraine during the coldest winter in a decade, the some European energy markets have shifted into a backwardation. On aggregate, Russia supplies 150 bcm/year of natural gas to OECD Europe, or 30 per cent of total gas use. Thus despite the weak economy, the European fuel markets have tightened, as reflected in UK and Continental spot natural gas prices."

The report said that gas in Europe will continue to trade in premium to gas in the US as a result of the recent blockade.

Merrill Lynch said in its report that it could take days to fully resume gas flow to Europe due to "logistical challenges on the distribution system". As per market reports just a third of the normal supply levels have been resumed in Russia.

The Bank of America subsidiary advised owning put options as a way to hedge the risk of a sharp potential downturn in European gas prices.