European gas volumes in 2013 may be well below their 2008 peak but with spot prices hitting new seasonal highs you'd be hard pressed to know it. With indigenous supply collapsing and LNG diverting to Asia, a market that should be in the doldrums looks poised to see prices breaking to the upside. As Gazprom's market share moves towards record levels and its export supply hits new peaks we worry quite where Europe expects to go next for its gas. We conclude that despite sub-par gas demand growth to 2020 European prices are moving to a new phase, with US LNG imports much needed if Russia's ever growing dominance and high pricing is to be contained.

Back in Gazprom's embrace
We are concerned. With indigenous gas production in steady decline, Norwegian output at peak, gas storage levels at five year lows and the start-up of material Asian-focused LNG capacity unlikely to begin in earnest for another 12-18 months European gas pricing looks increasingly to be balanced on a knife's edge. Influenced by an unusually severe winter, Europe is again caught in Gazprom's embrace and with it confronting elevated, oil-linked pricing. For Europe's IOC gas suppliers, not least Statoil, a new golden age is just arriving.

Whoops – we forgot about where to source forward supply
Moreover, after five years during which, perhaps deluded by the promise of unconventional gas, the continent's utility buyers and aggregators have been reluctant to commit to new supply be it LNG or pipeline gas, we question where a recovering Europe will source its much needed future supplies. With the delivery of European unconventional gas if anything moving backwards, North African stability in question and additional Caspian flows unlikely pre-2019 (and even then set at a paltry 10bcm) home-grown options look narrow.

Eoin Treacy's view One can't but have a pessimistic attitude to Europe's energy security when so many public officials have invested political capital in debunking unconventional supply initiatives. It is therefore notable that the European commissioner for Energy, Geunther Oettinger, was today quoted saying “Germany needs to keep option of shale gas open as it makes Putin nervous”.

Since the European Union is the successor of the original Coal and Steel Community it is reasonable to assume that the region has abundant supplies of unconventional gas, not least coal seam methane. If the political will existed to develop it Europe's energy security would be much less of a problem. At present the above quote is one of the only indications of support for drilling I have seen.

Oil-linked natural gas prices continue to predominate in Europe which accounts for why coal is so popular among utilities. The desire to displace fossil fuels with renewables such as wind and solar has been heavily subsidised in Europe with a corresponding negative influence on the profitability of German utilities.

The pace of RWE and E.ON's downtrends has moderated but breaks in their progressions of lower rally highs would be required to question medium-term supply dominance. Gazprom has been ranging below the 200-day MA since mid-July but a sustained move above it will be required to suggest a return to demand dominance beyond the short term.