Europe expected to face unusually cold winter

Sep 29, 2005 02:00 AM

A colder than average winter is expected to sweep across most of Europe, stretching gas supplies in Britain and lifting demand in the key German heating oil market, traders said.
A new forecast by the Met office, a British government agency, said December, January and February temperatures in the UK were likely to be colder than in the past eight years.

Temperatures in most of Germany -- Europe's biggest heating oil market -- are also expected to be colder than usual, although the Met Office does not issue specific temperature forecasts.
"A prolonged, severe winter is one of the biggest threats to the efficient day-to-day running of the country," said a Met statement, referring to the United Kingdom. About 40 % of Britain's power stations run on natural gas. A colder-than-average winter could raise already high prices, stretch gas supplies and trigger cuts in flows to industry, experts said.

Forward prices in the UK wholesale market, Europe's biggest, touched record highs in July in arally driven partly by supply concerns.
"If it gets colder than expected then we could see interruptions and prices could go higher," Andrew Morris of Oxford-based energy consultants ILEX said.
Gas network operator National Grid Transco has predicted that gas supply will meet demand this winter, though supplies will be the tightest on record as output from aging North Sea fields drops.
"National Grid's initial forecasts show that domestic supplies could be maintained even if we get a one-in-50 winter," said a spokesman for energy regulator Ofgem.

Energy companies are spending billions of pounds on new import projects designed to counter the drop in North Sea flows, but only two of them are expected to be operating in time to meet demand this winter. Traders say high gas prices in North America could also contribute to supply tightness in the UK this winter. High US prices could attract cargoes of liquefied natural gas that may otherwise have come to the UK market.
An unusually cold winter would help draw down an oversupplied heating oil market in Europe, which has been hit by low German demand and by arbitrage imports from Asia.

High prices and mild recent weather have discouraged German consumers from filling up their heating oil tanks in the pre-winter months as heavily as in previous years. German heating oil consumer stocks rose to 52 % of capacity by September 1 compared with 47 % a month earlier, but stocks were well down on 57 % a year ago and 67 % in September 2003.
"It has been 20 degrees Celsius and sunshine; gas oil futures prices are too high still, but colder temperatures would be good news," one German heating oil trader said.

London International Petroleum Exchange gas oil futures are the benchmark on which European prices for distillates -- heating oil, diesel and jet fuel -- are based. October IPE gas oil was trading at $ 612 a ton compared with their all time high of $ 663 on September 1 but still more than double the levels seen for most of the past few years.
Higher German demand would lift the whole European market for heating oil, where barge and cargoes have been trading at a discount to the benchmark futures prices and increase Russian exports to the continent. It would limit European gas oil exports to the United States in the peak winter demand season, traders said.

An industry expert said an especially cold winter would prompt German and other European consumers to fill up their heating oil tanks.
But he said sustained high prices could change their longer term behaviour, triggering a switch to natural gas or to other energy sources.

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