The premium held by the NBP contract for delivery this coming winter over the Summer ‘17 product hit a five-year low in September, as the expectation of strong LNG flows to Britain pressured the Winter ‘16 product. The anticipated need to inject gas into Centrica’s long-range Rough storage facility provided support to the Summer ’17 contract.
In 2016 so far, there have been 82 NBP winter-summer transactions, according to trade data seen by ICIS, indicating there is market interest in speculating on how much gas will be in store at the end of the gas winter.
Over the current month, the average spread between these products has been at a five-year low, averaging just 2.7p/th between 1 September and 26 September, according to ICIS closing prices.
This compares with a premium held by the Winter ’15 contract to the Summer ’16 product in the same period of September last year of 3.67p/th.
It is significantly lower than the winter premium in September 2013, which averaged 6.09p/th over the same period.
One trader said an expectation of strong LNG flows into Britain this winter has played a part in the tighter spread, as the forecast extra supply has driven down the value of the winter contract relative to the summer contract.
In the past year the difference in LNG prices between the Atlantic and Pacific basins has contracted, with the two now much closer to parity.
This has lowered the incentive for producers operating in the Atlantic region to export LNG to Pacific countries, as a sizeable premium is necessary to justify the cost.
The lack of arbitrage between the Atlantic and Pacific basins has ensured that more Atlantic basin production has stayed within the region.
This could free up more supply to flow to Europe in the winter months.
Between 1 and 26 September, the Japan delivered ex-ship (DES) LNG front-month contract held an average premium to the Britain DES contract of $1.20/MMBtu.
This compares with an average spread between the two contracts in the same period of 2015 of $7.30/MMBtu, and is drastically lower than the spread in September 2014, of $14.00/MMBtu.
There isn’t a corresponding increase in LNG expected into Europe in the summer months, given higher temperatures in the middle-east over the period, which increases demand relative to Europe.
The expected return to action of Britain’s long-range storage facility, Rough, has also factored in to the tighter winter-summer spread, as the need to inject gas in the summer months could add support to NBP prices.
All injections into the facility stopped in July, as Centrica Storage brought the ageing site offline and began a period of in-depth testing on its wells.
Withdrawals from the site will be made available to shippers again on 1 November, when 20 of the site’s 24 wells are brought back online.
However, on that day, the site will only hold 1.37 billion cubic metres (bcm) in store, compared with 3.2bcm on the same day in 2015, given that shippers have been unable to inject during much of the summer.
This means that the site is likely to be significantly emptier going into next summer, which could greatly increase the demand for gas over the period to inject before the start of winter 2017-2018, accounting for the relative strength of the Summer ’17 contract to the Winter ’16 contract.
On the first day of each of the last three gas summers, which falls on 1 April, Rough has held an average 935 million cubic metres (mcm).
This is only 435mcm more than the site will have going into the start of the gas winter, suggesting that site will be significantly emptier when summer arrives. email@example.com