Market shrugs off highest energy demand of the season

The UK has recently experienced three straight weeks of below seasonal-normal temperatures. The colder than normal weather combined with low wind generation and ever darker evenings have driven up energy demand.

Last week saw UK gas and power demand rise to their highest levels for the winter so far. This was driven by a significant increase in domestic consumption as households ramped up their heating to combat the cold.

Minimum temperatures in London dropped to minus 2 degrees, the lowest since early February. In parts of Scotland, temperatures overnight reached lows of minus 10 with another cold spell forecast for next week.

Temperatures

Year-on-year gas demand

Overall gas demand reached 350mcm. This is the highest since early February, with domestic gas consumption rising to over 240mcm as households increased heating use. Year-on-year gas demand was 100mcm higher as November 2018 saw the UK enjoying a late heatwave with a prolonged spell of above average temperatures. This kept gas demand under 250mcm.

LDZ Gas Demand

The increase is even more prevalent in LDZ gas demand. This has averaged 190mcm/d so far in November, the highest in more than five years. Domestic gas demand in November is so far 45% higher month-on-month. It’s 20% higher than the same period in November 2018.

LDZ gas demand graph

October gas demand was also the highest in over five years with consumption up 20% since 2017. As a share of overall gas demand, LDZ has also climbed strongly in recent months. Domestic use accounts for over 70% of the country’s overall gas consumption.

Gas is also playing an increased role in the electricity sector, which adds another element to this winter’s higher gas demand. Demand from power stations reached 78mcm last week, the highest since January. Electricity generated by gas power plants has averaged 14.9GW per day in November. This is the highest since January and an increase of 2GW on November 2018. This is despite a continued trend of reduced electricity demand from 2018 to 2019. Lower wind output, which is on average 1.5GW lower year-on-year is contributing to the increased gas use for electricity generation.

Monthly generation graph

The last time domestic gas demand was close to this high was in 2016. Front-month gas prices climbed nearly 30% as temperatures dropped in early November. In November 2018, front-month gas prices averaged 50p/th – 25% higher than the current Dec 19 contract.

However, so far this winter, gas prices across the curve have moved lower, breaking below a long-standing trading range. The December 19 gas contract has fallen 20% since the start of October, while the Summer 20 prices are at their lowest level in over 18 months.

Gas months graph

 

High demand no match for supply flexibility

If demand is higher then why has the price reaction been muted or even bearish? Increased gas demand from home heating and the electricity sector during the last three weeks of cold temperatures have seen very little price support. This is because the impact of the increased consumption has been entirely offset by the levels of spare and flexible gas supplies available to the market. This is notably from an influx of LNG tankers and record high levels of gas in storage. Supply levels are persistently matching fluctuations in demand with flexibility from Norway, LNG and storage helping to manage the higher demand levels seen recently.

LNG Imports

The UK has enjoyed an influx of LNG arrivals this winter, with Britain an attractive destination for tankers amid an oversupplied global market for the fuel. Fifteen tankers arrived in October, eighteen tankers are booked for November and seven arrivals are confirmed for December. LNG imports for Q4 2019 have already surpassed levels from Q4 2018.

lng imports graph

The influx of LNG and flexibility from Norwegian and UK gas flows have left storage withdrawals and Interconnector imports struggling to get gas onto the grid. Both sources offer around 150mcm of combined gas supplies which can be attracted to market when required. It is this extent of spare capacity available to the gas system which has kept prices so depressed, in spite of rising demand levels.

Gas Storage Withdrawals

Storage withdrawals had averaged 8mcm/d for the winter and colder temperatures last week lifted that withdrawal rate to around 40mcm/d. The potential for sendout is over 90mcm/d across the country’s seven facilities.

However, even with last week’s increased withdrawals – which have seen reserves declining at 0.4TWh per day – stocks are still at record highs for the time of year. European storage stocks are also at all-time highs, after surpassing 1,000TWh in September, with zero net withdrawals recorded so far this winter.

gas storage graph

European imports via the Interconnector have been untouched, with gas prices unwilling to increase to a sufficient premium over the European market to encourage deliveries. If the price response was sufficient, however, an additional 60-70mcm per day of gas could be available. This is further strengthening the health of the current gas system and its flexibility in responding to spells of higher demand.

With the extent of spare capacity available, the gas system is able to manage prolonged spells of below seasonal-normal temperatures. It will likely take a severe cold snap, alongside a breakdown in supply or a slowdown in LNG imports to warrant a significant rebound in prices across the energy market.

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Europe cannot compete with Chinese dash for LNG

European storage started this summer at its lowest levels on record following the impact of the ‘Beast From the East’. This should have encouraged very strong injections right through the summer, ensuring there is enough supply to deal with winter demand.

 

Storage across Europe has been filling, and overall levels are closing in on the average seen over the previous five years.

 

 

However, when we look a little deeper, we can see that injections were very strong in June. As the summer has progressed the rate of injections has remained fairly constant, while in previous years the rate increased as we moved further into summer. Industrial shutdowns and school holidays in August freed up gas for increased injections.

 

This August has only seen a moderate increase on July’s levels and, possibly more importantly, a slower rate of injections than last year. This is despite the need to put more gas into storage.

 

Why is less gas going into storage?

Demand and piped supply have remained at similar levels to previous years but the biggest difference is coming from Liquefied Natural Gas (LNG). Looking at total LNG send out across Europe we can see a significant reduction in volumes. The difference is almost the same as the equivalent reduction in injections.

 

The lower levels of LNG are because fewer cargoes are coming to Continental Europe and the UK.

This is due to prices elsewhere being much higher. Looking at the volume of LNG received in the UK, along with prices in the UK and the Far East, it’s clear to see when the difference between the prices has an effect on our level of imports. Suppliers will send the gas to the area they will make the most profit.

 

Prices in Asia have such a large premium over Europe due to China’s insatiable demand for gas.

As the Chinese government looks to clean up the environment, it’s switching thousands of homes and businesses away from coal and onto gas. This has seen demand for LNG double in the last two years:

 

For UK consumers, as the gas market becomes ever more global, increased competition for gas will likely put pressure on prices, pushing them down. However, in the shorter term, if the UK needs extra gas (for instance due to a cold snap or supply issue) prices will have to at least match the Asian price to attract supplies for one of the UK’s three LNG terminals.

With Asian LNG prices for the coming winter over 20p/therm higher than in the UK this is an early indication of the cost of meeting higher demand in the heating season. This issue of reduced flexibility is particularly prevalent this year in the light of the Rough closure and the scaling back of Groningen production.

 

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