EU referendum: Weak sterling to support NBP in lead up to Brexit vote

Author: Thomas Rodgers


Market participants expect to see strong prices at the NBP natural gas hub in the lead up to Britain’s referendum on EU membership, primarily as a result of a weaker pound.

A stronger NBP would have an inflationary impact on the UK power market, due to the amount of gas that is burnt for power generation, coupled with a long-standing correlation between the two markets which will often be traded by the same trading desk.

On 23 June, 42 years after it voted to join the EU, the British electorate will go to the polls and decide whether Britain should remain a member of the institution.

A key driver of NBP and UK power prices as a result of the referendum will come via currency markets.

At the time of writing the value of the pound against the euro had already dropped by 7% over the last year with €1.00 worth around £0.79.

And a number of banks have said that, amid uncertainty around Britain’s European membership, sterling will shed further value into the run up to the referendum.

Goldman Sachs, UBS, Credit Suisse and HSBC have all said that the uncertainty will further depress the value of the pound.

“We think that the result of the referendum will be one of the UK to remain in the EU. However, we expect some further weakness of sterling between now and the vote on 23 June,” UBS said.

A weaker pound typically drives up NBP contracts, particularly those on the far curve, as demand from traders dealing in increasingly valuable euros climbs.

Currency can also influence the power market directly due to physical links between the UK and France, and the UK and the Netherlands. However, the UK generally holds a premium over its connected markets because of its unilateral carbon tax, which means the import-export balance of its power market is less sensitive to exchange rate adjustments.

Flipping the premium

At the start of 2016, the NBP Summer ’16 contract was at a 0.797p/th discount to its equivalent on the Dutch TTF. Yet on Tuesday, the British contract closed 0.17p/th above its TTF equivalent, ICIS data showed.

Support from sterling, in addition to relatively full stocks in Europe, has flipped the premium between Europe’s largest gas markets.

“The main issue will be the exchange rate leading up to the vote,” one trader at an energy procurement company said.

Another NBP trader said: “We will probably see sterling weaken in the run up to the vote and the NBP will rally off that.

“There will also be some price volatility around it. But that will all be driven by currency like it was for the Scottish referendum.”

Uncertainty in the run up to the 2014 Scottish independence referendum drove volatility in sterling, which fed through to NBP prices.