Bank Expects UK Gas prices to continue to rise

Deutsche Bank has raised its 2011 Brent crude forecast price from $107.75 to $117.50 a barrel due to tight supply margins and strong demand, and also lifted its natural gas price forecasts to reflect it.

Deutsche Bank (DBKGn.DE) also raised its Brent forecast for 2015 to $125 a barrel from $105 after recent informal output increases in Organization of the Petroleum Exporting Countries (OPEC) countries left less of a supply cushion.

“Reductions in OPEC spare capacity and a strong demand outlook lead us to raise our Brent oil-price forecast across the curve,” Germany’s biggest bank said in a research note on Tuesday.

“We raise our gas-price outlook by a similar amount as we believe market supply-demand dynamics will force a closer relationship between spotmarket and oil-indexed prices over this period.”

Benchmark Brent crude prices have risen by about a third since the start of 2011, hitting $127 on Monday, while UK gas prices have risen around 23 percent since violence in Libya cut exports to Europe in February.

The world’s biggest crude exporter Saudi Arabia increased output in March to make up for disruptions in fellow OPEC member Libya. But the holder of most of the world’s spare capacity has since cut back production, Saudi sources said on Tuesday.

Deutsche Bank said it expects global oil demand to rise by 1.65 million barrels a day (bpd) in 2011, while it forecasts OPEC spare capacity will shrink from 5 million bpd to 3 million bpd.

Because of higher oil prices, and UK plans to introduce a minimum charge for emitting carbon — effectively raising gas price which power generators will be prepared to pay before switching to dirtier coal — Deutsche also upgraded its 2013-2015 price outlook for continental European and UK natural gas prices.

The increase oil price forecast implies an increase in continental European oil-indexed gas prices of 12-14 pence per therm (or around 4.7-5.3 euros/megawatt hour) over 2012-2015 versus the bank’s previous oil-indexed price forecast.

Most UK gas contacts are not directly linked to oil prices. But they are influenced by crude because stronger oil means continental European companies may buy more gas in the UK as their oil-indexed supplies become more costly.

As a result, Deutsche has revised upwards its UK gas price forecast for 2013 by 3.6 pence per therm, based on the higher fuel switching price, and by 12-14 pence per therm for 2014-2015 because of the higher oil price forecast, the bank said.

The average price of futures contracts on the global benchmark UK gas market for the period from April 1, 2012 to March 31, 2013 was around 70 pence per therm on Tuesday.

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