High crude prices are limiting a recovery in European natural-gas demand, according to Bank of America Merrill Lynch. “High oil-indexed contract prices have clearly been curbing demand,” Merrill analysts including Sabine Schels in London and Francisco Blanch in New York said in an e-mailed report dated Oct. 8. “We find a very strong price elasticity of demand relative to oil prices lagged by six to nine months, especially in Germany.” European gas demand dropped 5 percent, or 27 billion cubic meters, last year, the bank said. “It will take at least another year to return to 2008 pre-crisis levels of gas consumption,” Merrill said. In Germany, contract gas imports from Russia cost more than $8 a million British thermal units, compared with about $5 a million Btus on the Gaspool trading hub, according to Merrill. The difference in price between gas bought under multiyear supply contracts linked to the cost of oil and the price of gas on spot markets has narrowed lately due to supply constraints, the bank said. Most European gas is sold under multiyear contracts. OAO Gazprom, the world’s largest gas producer, received $1 billion in penalty payments last year from European gas consumers who opted to take less than contracted volumes under so-called take-or-pay contracts, Merrill said. “They could receive another hefty sum this year,” it said. Brent crude oil, Europe’s benchmark, has risen 17 percent over the past year to $83.83 a barrel on London’s ICE Futures Europe Exchange. To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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