A Close-run Thing? Winter 2006/07 in the UK Gas Market

As the UK supply and demand balance is set to remain tight again this coming winter, the market's fear of unexpected events sustains the current high forward prices. If the new pipelines and liquefied natural gas terminals arrive on time and if there is enough gas behind this new capacity, however, prices should drop to levels lower than those seen last winter and lower than those implied by the forward curve.

* Physical factors as the main driver. The timely completion of new supply infrastructure, and its subsequent rate of utilization, will be the key to assessing the price impact of the close-run balance of supply and demand.
* Learning from the past. Lessons learned from last winter about the market players' reaction to price signals provide a basis to draw implications for next winter.
* A tale of "two halves." The first half of the winter, from November to January, will represent the critical period with the most uncertainties; some relief can be expected thereafter.

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