LONDON The European Union's natural gas network is likely be oversupplied by over 10 percent of last year's entire consumption, infuriating customers howling with pain from price hikes.
Europe's oversupply, according to Reuters research and analysts' data, calls into doubt last summer's decision by many utilities to raise their retail gas prices for 2012.
Many gas providers launched long-term, typically two year, fixed price deals that would hold off further increases, but would also not reduce rates should wholesale energy prices drop.
"If excess gas production drives down wholesale costs we would clearly expect this to be reflected in the retail prices customers pay. Suppliers need to play fair by their customers around price changes," Audrey Gallacher, Director of Energy at Consumer Focus, said.
"Fixed-price deals are a gamble which can pay-off if prices rise. However long-term fixed price deals would certainly not benefit customers if the wholesale price trend is downwards," Gallacher added.
At projected import, domestic production and consumption levels, the EU's gas market will have 50 billion cubic meters (bcm) more excess supply in 2011 than it did last year, and the system is likely to remain similarly long in 2012,
This compares to an EU consumption of 492.5 bcm in 2010, according to BP, and to more than France's annual gas consumption of 47 bcm, and only slightly less than Britain's 57 bcm production in 2010.
This year and next year are likely to see an import and domestic production excess above consumption of just over 60 bcm.
This compares with a positive balance of just over 10.5 bcm in 2010, according to figures compiled from BP's (BP.L) annual statistical review.
Some analysts said the retail hikes had been based on wholesale rises earlier in the year.
"Energy companies generally make incremental forward market purchases several quarters ahead of delivery to cover their retail load (and) as a result the rise in wholesale gas prices over the second half of 2010 and first half of 2011 is still feeding into the cost of energy retailers," Olly Spinks of Timera Energy consultants said.
"However, it is reasonable to question whether energy companies have a tendency to delay passing through wholesale price reductions as compared to price increases," he added.
Since the hikes were introduced, slowing economic growth has significantly pulled down wholesale gas prices, with the benchmark UK NBP Summer 2012 and Dutch TTF 2012 gas contracts down over 8 and 9 percent respectively since the beginning of September.
Societe Generale (SOGN.PA) said European gas demand would be around 7.5 percent lower in 2011 than last year, a faster annual rate drop than at the height of the international recession in 2009.
Deutsche Bank DBN.UL said it expected demand in Spain, Italy, France, Germany, UK, Netherlands, and Belgium to be around 374 bcm next year, and 380 bcm in 2012.
These countries together make up around 80 percent of the entire EU gas demand, according to the German bank, meaning that total EU gas demand in 2011 and 2012 would likely be around 449 and 456 bcm respectively.
With oil prices in steep backwardation -- meaning that oil for later delivery is cheaper than for immediate shipping --market sentiment implies that wholesale energy prices are expected to drop further before they recover.
Analysts said that the excess length this year was also down to milder temperatures.
The winters of 2009/2010 and 2010/2011 were amongst the coldest on record, and while forecasters also predict below long-term average temperatures this winter, expectations are slightly milder than for the previous years.
Traders said such an excess in potential supplies could result in large production cuts from suppliers through maintenance works brought forward in order to avoid a glut of supplies.
It could also mean that buyers in long-term agreements will try to renegotiate their minimum purchase requirements in order to push back deliveries to a later date.
"The big gas producers will most likely take action before the market gets completely washed over with gas, but the figures show that there is no shortage of supplies in Europe," one gas trader said.
"And buyers will probably try to negotiate their long-term minimum annual buying requirements," he added.
Analysts said they saw a price recovery toward the end of 2012 as the economy recovers and Europe's prices react to the tightening Asian LNG market.
"We expect a tightening in global LNG markets - intensified by this year's events in Japan and Libya - (and) as a result, we see upside to UK NBP prices relative to the forward curve," US bank Goldman Sachs GS.UL said in a research note.
But the bank added that "despite our view for UK NBP prices in 2H2012," the risk of further deterioration in financial markets and a renewed global recession could move gas prices "sharply lower from current levels."
Societe Generale said it expected gas prices to drop in 2012 and that it did not see the LNG market tightening before 2013 or 2014.
In countries where it is traded (e.g. UK), the oversupply is also likely to affect the use and price of gas storage facilities.
Expectations of lower gas prices going forward makes storing the fuel less attractive, while reducing profit for companies that lease storage space.
British utility Centrica (CNA.L) expects to make less profit from selling gas storage space this year at its Rough storage site, the UK's biggest such facility, as the service loses significance in supplying gas in a well supplied market.
In other countries with large gas storage capacities, like Germany, the impact is less likely to be felt in the storage market because the vast majority of its capacity is used as strategic reserves.
(Editing by William Hardy)