Gas prices fell heavily again last week with contracts across the curve falling to new lows. Price drivers for the market are unchanged with the extent of oversupply and strength of fundamentals continuing to weaken prices. Balance of Winter and Summer 20 prices fell 7% across the week, with losses continuing today. The Summer 20 contract has dropped nearly 40% in the last three months. The oversupply is being driven by record storage stocks in the UK and Europe. Unseasonably mild temperatures so far this month, coupled with very high wind levels have depressed demand.
Meanwhile record LNG imports have balanced the gas system with minimal use of storage withdrawals or Interconnector imports from Europe. Price falls this winter have been strongest for the Summer 20 contract, which anticipates very limited injection demand and an inability to absorb excess supply during the milder months. The strength of losses in short-term contracts have now brought down the rest of the curve with seasonal 2021 contracts down 5% across the week, breaking below their previous December lows.
Gas demand has risen sharply today with consumption rising around 80mcm from last week, as temperatures briefly drop to below seasonal-normal levels. Lower wind output of under 5GW this week is also increasing gas for power generation. However, the demand is being comfortably met by supply, notably from LNG, which has risen to more than 130mcm to match the higher demand. This underlines the strength of flexibility within the gas supply system. Milder, windier conditions are returning at the end of the week.
In the power market, contracts on the curve are following the gas market lower, reflecting the declining costs of gas for generation. Very high winds pushed Day-ahead power prices to new lows of £32/MWh but the prompt has risen across the week in anticipation of higher demand from lower winds and colder temperatures this week.
Wind generation across the week was consistent at over 8GW, reaching highs of 14GW as Storm Brendan swept across the UK. Power demand is expected to rise this week as temperatures have dropped to below seasonal-normal levels with wind output as low as 2GW. However, the extensive gas supply flexibility offered by record storage stocks, LNG and Interconnector imports is weighing heavily on prices.
Prices across the curve are down 3% week-on-week. However, the losses in the power market are more gradual than the corresponding gas contracts. This is the result of price support from rising carbon prices, protecting the power curve from further losses. Carbon costs pushed above €25/tCO2e last week, to new highs for the year.
Gas prices on the curve moved lower week-on-week, with the market close to the record contract lows seen at the end of December. However, price movement was more volatile after gains of as much as 10% in the aftermath of the US air strike in Iran. Those gains had been fully reversed by the middle of last week. Concerns over supply disruption in the region, and possible LNG exports from Qatar eased, with the strength of fundamentals within the market returning to focus as the biggest price driver.
Declines across the gas market seen since October have accelerated in recent weeks as the extent of oversupply in the system became more apparent. After reaching eight-year highs in December, LNG imports continued to flood into the UK in the first half of January. Gas demand levels have been unseasonably low amid above average temperatures and very strong wind levels. The record low levels attracted some buying interest, while reduced LNG sendout and Norwegian imports via Langeled left the system undersupplied on some occasions. This provided some price support with the market bouncing off those lows late last week, with a continued modest recovery today. However, prices remain close to historical lows, with the fundamental outlook for the gas market remaining highly bearish. Losses were strongest on the front of the curve with the February market and Summer 20 prices down 7% week-on-week.
Prolonged above average temperatures are forecast in January while the UK and Europe is set to end winter with record levels of gas in storage which will affect injection demand during the milder summer months. Storage withdrawals and Interconnector imports have been largely untouched throughout winter, but can provide substantial supply flexibility and spare capacity as required.
Power prices have mirrored movements in the gas market. A bounce across the energy mix in the aftermath of the US air strike in Iran has been reversed with contracts pushing back towards the lows seen at the end of December. The very low cost of gas-fired generation, particularly this summer, is weakening electricity contracts.
The February power market fell 5% across the week with seasonal power contracts for 2020 down 4%. Elevated carbon prices, which remain above €24/tCO2e are underpinning the power market, slowing the extent of declines relative to gas. However, the downward pressure on electricity prices continues, with very high renewable availability providing further bearish signals.
Day-ahead power prices rose across the week as demand increased from their holiday lows. However, at £36/MWh, the prompt market remains highly depressed, below the trading range seen during most of the summer season. Furthermore, while electricity consumption rebounded to 45GW last week the outlook for consumption remains very weak because of the near-record levels of wind generation.
Forecasts of up to 14GW of wind generation throughout the coming week is driving down demand. The high levels of on-site embedded generation from wind is reducing demand on the transmission network. Peak power demand this week is forecast at just 43.0GW, a drop of 4GW compared to the same week last year. The high winds are expected to continue until Friday as Storm Brendan sweeps across the UK. Weather conditions are set to shift next week as winds drop and temperatures cool from current above average levels.
Gas prices on the curve rebounded last week, bouncing off contract lows reached between Christmas and New Year.
Prices across Europe pushed to new lows after a new transit supply agreement between Russia and Ukraine was agreed, avoiding supply disruption.
The Summer 20 market dipped below 30p/th, down 10% since Christmas. However, contracts across the curve have rebounded since Friday, following supply risks linked to escalating tensions in the Middle East. A US air strike has killed a top Iranian military general. Tehran has vowed “severe revenge” with the risk of disruption to the region’s vast oil supply providing some price support.
LNG may also be affected by a possible new conflict with the US and Iran previously rowing over access to the Strait of Hormuz, a crucial supply route for tankers. Strong gains in the oil market – which is testing highs of $70/bbl – provided support to longer-dated gas prices, delivering in 2021. While there may be further volatility as the situation develops, fundamentals remain bearish, with oversupply capping prices around their pre-Christmas lows.
LNG imports were at their highest since April 2011 in December, while thirteen tankers are already confirmed for January arrival. Interconnector imports remain untouched and a storage overhang is inevitable as lower demand during the holiday period meant 3TWh of gas was injected into storage.
UK gas reserves are over 95% full and at record highs for the time of year. Demand forecasts for January are also price depressive with above average temperatures expected for at least the next two weeks while wind generation dominated the fuel mix, providing a third of UK power in the last week after averaging over 10GW a day. With energy demand in the short-term expected to be low the risk of oversupply and an inevitable storage overhang is still weighing on gas markets.
Power prices pushed lower during December led by Day-ahead and balance of winter contracts that reflect the oversupply in the gas market and lower cost of gas-fired generation. Electricity demand fell heavily over the Christmas holiday period, driving Day-ahead power prices to lows of £32/MWh, not seen since early October.
While consumption has picked up as schools and businesses return to full operation, power demand maintains a significant reduction to previous years. Very high wind generation over the last week has reduced the use of fossil fuels, while the gas burn being utilised is at a low cost level.
Wind has provided a third of UK electricity so far this month, leading the fuel mix with average output of 10GW a day. The strong renewable availability is forecast to continue this week as the UK benefits from windy, mild weather conditions, which are providing downward pressure to prices. This is the reverse of the cold, low wind scenarios that risk higher prices during the winter season.
Across the curve, power prices followed the gas market lower over the holiday period, hitting new lows at the end of December. The market has rebound marginally since Friday following the escalating tensions in the Middle East. However, the scale of movement in power, both lower and in the rebound have been more gradual than in gas. The continued elevation in carbon prices, which are holding above €24/tCO2e are helping to underpin the power market. Week-on-week electricity contracts remain down with the Summer 20 contract under £40/MWh.
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.
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.
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.
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.
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.
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.
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.
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.
Gas has led the way, particularly in the balance of winter contracts. These falls have come partly due to the very high levels of storage but also because of all the spare capacity that could be called upon if required. As a result, power prices have fallen due to the lower fuel cost.
LNG has been the main game changer with the deluge of tankers flooding in to Europe over the last year. Increased export capacity in the US and Russia has led to the increase in extra imports to Europe. It is also a symptom of the global oversupply in the worldwide market place. The liquid commodity markets and high import capacity make the UK an ideal location to offload any excess supply. LNG terminals are currently operating at 75% of their capacity, with all the extra gas being sold into the NBP pushing prices lower.
LNG imports graph
European imports have been virtually non-existent throughout the winter but more gas could be attracted through these pipes. There is a potential capacity of 94 MCM/d to come over the BBL and the Interconnector. To start attracting this gas the premium over TTF would firstly have to rise above the NBP entry charge of 1.56p/th and then cover the cost of using the pipelines. This means that if prices increase their premium over the continent to more than 2p/th additional gas will start coming to Britain.
Given the competition between supply sources, storage just cannot make it onto the grid, even on higher demand days, and this capacity overhang is weighing on prices.
Gas spare capacity graph
However, the falls in prices for power have been less substantial and purely driven by the falling cost of fuel. Fundamentally the UK grid is seeing some of its tightest conditions in years. With nearly 3GW of coal capacity having retired in the last 12 months. The remaining coal units are now running as baseload and all flexibility is coming from gas. There remains spare capacity but this is the least efficient or most costly plant.
On windless, cold days we are seeing some stress on the system. Currently Monday, 18 November, has a negative margin with 300MW still required to meet anticipated demand. This has pushed power prices to their highest since February at £54.50MWh.
On Wednesday evening we saw the highest demand of the winter so far, of 45.2 GW. The above chart shows where generation was coming from at the peak on the left, with remaining output available for Monday on the right. While this shows the potential generation that could come on at the current price levels, it isn’t expected to on Monday, hence the negative margin.
So far Monday’s price reaction has been relatively muted, but it has occurred at a time when the gas systems oversupply is weighing heavily on the whole energy market. If it was happening amidst different market conditions the price outlook would be very different.
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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