UPDATE 1-At 3-year low, UK gas prices show no Russian supply fears

Fri May 16, 2014 9:46am EDT

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By Michael Szabo

LONDON May 16 (Reuters) - Wholesale spot British gas prices fell to a three-year low on Friday as ample supply and warm weather outweighed fears of possible cuts in Russian supply via Ukraine.

Gas for delivery next week dropped to 43.80 pence per therm, the lowest level since September 2011, as temperatures were forecast to rise to more than 4 degrees Celsius above seasonal averages, cutting into demand.

"This price slump is more than a seasonal decline as winter turns to spring. It reflects a northwest European gas market that is substantially oversupplied into the summer," David Stokes of Timera Energy said.

One of the mildest winters on record for Britain and most of continental Europe reduced the need for household heating and allowed utilities to inject more gas into storage.

Britain's current storage levels - at around 67 percent of capacity - are three times the level they were at the same time last year after more gas was stored over the past two months in anticipation of a possible cut in flows from Europe due to the Ukraine crisis.

Britain has also maintained healthy imports of liquefied natural gas (LNG) from Qatar, which has further bolstered supply, as the UK's seasonal summer lull of low gas demand approaches.

Prices have fallen by more than 17 percent since the beginning of the year and are a third lower than last summer.

Russian President Vladimir Putin has threatened to shut off supply to Ukraine if it fails to pay its outstanding bills, although energy minister Alexander Novak said on Friday that a compromise between Kiev and Moscow was possible.

State-run exporter Gazprom has demanded that Ukraine pay in advance for gas for June after its debt for Russian gas topped $3.5 billion.

Russia supplies around a third of Europe's gas demand, sending almost half of it via Ukraine.

Most of Russia's gas to the EU flows to Germany and central Europe.

While Britain sources only around 5 percent of its current gas demand from Russia, wider cuts to Russian flows to Europe could have ripple effects that lead to higher prices in Britain.

"The market is not too worried now about Ukraine as stocks are at record highs and we are in summer," said Thierry Bros, a senior analyst at Societe Generale.

Bros said part of the risk lies in Ukraine siphoning gas that destined for Europe should Gazprom cut supply.

"Who pays for this gas and what if Gazprom isn't paid? Gas prices could stay at this level until this problem starts."

Moscow has reduced gas supplies to Kiev during two past pricing disputes, causing disruptions to supplies to Europe. (Reporting by Michael Szabo, additional reporting by Henning Gloystein; editing by William Hardy)

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