Wednesday, November 18, 2009

Europe's Gas Supply

I noted with interest an article in The Globe and Mail where Gazprom CEO Alexander Medvedev said that the excess natural gas supply situation in Europe would resolve itself by 2011 and the gas spot price would then rise to meet the oil indexed price of long-term gas contracts. Last week I wrote about the impact of shale discoveries and expanding LNG capacities on the supply of European natural gas and the difficulty the gas suppliers like Gazprom will have in maintaining their traditional long-term natural gas supply agreements that are priced based on the price of oil now that gas spot prices in Europe are low.

I certainly don't hold myself out as an international economist, but it seems as though the supply part of the supply/demand pricing equation is undergoing fundamental change worldwide, not just in the U.S.  Russia uses its gas pipelines for political gain in Europe, but this position seems to be weakening as Europeans have access to more sources of gas. 

I'm certain that gas demand will pick up over the next couple of years as the worldwide economy improves, but I think the Russians are selectively ignoring a fundamental shift on the supply side.  Does Gazprom know something or are they engaging in political posturing?  Or worse, wishful thinking?

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