Wholesale energy pricing in the UK going into winter presents a picture of well supplied gas and power systems without a hint of risk.
But this is not necessarily the case, with the power supply margin forecast at a multi-year low and gas storage stocks well down on last winter’s. So why are the markets seemingly so relaxed?
Natural gas for delivery at the British NBP over the winter expired at the end of September at its lowest price since ICIS began assessing the product back in 2010.
Any uncertainty about winter demand has been considerably outweighed by downwards pressure from an oversupplied market both in Europe and globally.
An unconstrained Norwegian gas network in the fourth quarter has paved the way for strong exports to Britain and a potential annual production record.
Producers and operators completed all remaining key infrastructure maintenance in the third quarter, data from network operator Gassco showed.
Norwegian exports reach Britain at the St Fergus and Easington terminals and are a key supply source in winter when demand climbs.
From January-August, actual production was 12% higher than Norway’s offshore regulator had forecast it to be. If this increase were extrapolated for the rest of this year, Norway would produce 120.5bcm for the year as a whole.
Anything close to that level would be the most the country has produced in one year, 12% higher than the previous record of 107.2bcm set in 2014.
Supply from mainland Europe also looks comfortable despite a cap on production at the Groningen cluster of fields in the Netherlands.
During the winter, Britain – where demand is more seasonal – typically receives gas from mainland Europe via the BBL and Interconnector pipelines.
Participants are confident that any deficits in supply can be met by other supply sources, principally from Russia.
Britain is also set to feel the bearish impact of an oversupplied LNG market. Britain often acts as a market of last resort, with LNG traders able to easily unload volume on the NBP when they cannot find a better place to sell.
In addition, the December ’15 contract briefly rose above the corresponding ICIS East Asia Index (EAX) earlier in October.
Two spot cargoes landed at Isle of Grain in the last week and this premium suggests more could come to the market over the winter.
In March, Centrica storage announced a 25% reduction in available working volume at its Rough gas storage site. While deliverability is unchanged, this represents approximately a 1bcm loss in working capacity.
However, the collapse of seasonal spreads over the past few years has meant that its structural impact on pricing has been slight.
Ample free capacity at Britain’s key import pipelines amid waning demand has depressed the need for large stocks.
This does mean, however, the British market will be more dependent on import flexibility and could be more prone to winter price shocks.
The only possibility of significant upside to wholesale prices would be a sustained period of very cold temperatures.
Some reports have suggested that because of the El Nino phenomenon, this winter will be colder and longer than normal. But climate scientists say more factors other than El Nino need to be considered.
Despite surplus power plant capacity being expected to reach as low as 1.2% of peak demand this winter, the expiry of the Winter ’15 contract at a record low revealed little concern over the prospect of price spikes this winter if power supply is squeezed.
Falling NBP natural gas prices over the summer provided the impetus for the front winter power contract to fall ahead of delivery. The marginal nature of gas-fired generation in the UK generation stack means forward gas prices are the primary driver behind movements on the power curve.
As expected, a premium in the second quarter of winter was maintained over the first quarter ahead of its delivery, reflecting the risk of potential increases in gas and power demand in response to the traditionally colder weather that occurs in January and February.
Entering winter delivery, Q4 ’15 Baseload expired at a 3.6% discount to ICIS’ assessment of the Q1 ’16 Baseload at the end of September.
However, if concerns over supply margins are staved off by the absence of any extremely cold weather, trade on the front quarter could follow a similar pattern to the first half of last winter, when a bearish spell of fundamental drivers on the NBP near curve late in 2014 helped to pressure the equivalent section of the power curve.
This resulted in Q1 ’15 Baseload expiring at a 12% discount to the Q4 ’14 Baseload at the time of its delivery in late September 2014.
Even if supply is squeezed and results in the dispatch of the most expensive thermal plant, the effect of prompt price spikes might not translate to bullish near curve prices.
In October 2014, the loss of half of the UK’s nuclear baseload generation on some days helped to support day-ahead prices, while the forward curve remained unaffected. email@example.com and firstname.lastname@example.org