Full British storage points to bearish front winter

Natural gas demand was so limited in Britain during the final quarter of 2015 that storage sites were in net injection mode.

Data from system operator National Grid shows that in the last three months of the year 283 million cubic metres (mcm) was added to sites.

During the quarter demand averaged 245mcm/day, which is below normal for the time of year but actually 5mcm/day higher than the equivalent period in 2014, also a very low consumption winter.

Mild temperatures were the main reason gas use was so low and this has been bearish for NBP prices.

In the final quarter of 2015, the British Day-ahead contract moved down by 6.462p/th, reaching lows not seen since 2010.

NBP prompt prices have been trading at a discount to the near curve, incentivising some shippers to put off withdrawing in favour of waiting for higher prices, and in some cases injecting.

Near curve impact

With so little gas coming out of storage, near curve price have been pressured, due to the expectation that any rise in demand could be offset by higher withdrawals.

So far this winter, each front-month contract has expired at a discount to the one preceding it.

This discourages withdrawals further, as declining prices mean some shippers would lose money if they monetised their stocks at this stage.

At the end of March 2015, the front summer contract expired at 45.563p/th, which is higher than all the winter month expirations in the final quarter last year. This could mean little, if any, money was made from most storage plays.

The far curve

The relative fullness of storage also has a significant influence on the front two seasons and beyond.

At the end of the first quarter in 2014, British storage sites held more than 2.4 billion cubic metres (bcm) of gas. At the start of that year there was about 4bcm in storage, similar to the volume on 1 January 2016.

During March 2014 the front summer lost 9.25p/th, as traders became confident injection demand would be very low in the second and third quarter.

The front winter followed it down and, after starting 2014 trading above 70p/th, expired at 57.55p/th and led to a period of declining prices that has persisted until now.

If Winter ’16 fell by a similar amount, the contract could end the summer close to 20p/th, although it is likely to meet resistance from technical support levels before falling that far.

Waiting for the cold

A sustained drop in temperatures could severely alter this picture, as was the case in 2013.

At the start of that year, British storage sites held about 3.95bcm, only fractionally less than at the start of 2016.

Then a cold snap hit, lifting demand and placing a much greater reliance on stocks, with almost 3.7bcm used from storage during the first quarter of 2013.

The front-summer was pushed up by 6.975p/th during those three months and it took a mild winter the following year for NBP prices to come down to levels seen before the 2013 demand jump.

Consumption in Britain has been fairly limited so far in 2016, but is expected to rise this week as temperatures decline. How long this colder period persists could be the key factor influencing Summer and Winter ’16 prices and will ultimately set the tone for the NBP prompt from October this year, until early 2017. ben.samuel@icis.com