LONDON (ICIS)--The NBP Q3 ’19 natural gas contract could fall by 5p/th before expiry according to some traders, with risk premium expected to drain from the contract as the summer period starts.
In a reversal of the normal relationship, the British Q2 ’19 contract has been trading at a discount to Q3 ‘19 since the end of January, with the spread closing at 2.188p/th on average in March.
After a mild winter in Europe with storage on course to end March a third full, as well as frequent LNG deliveries to Europe, much of the risk has drained from the Q2 ‘19 product.
This has pressured Q2 ‘19 relative to Q3 ‘19 and led to the change of the normal pricing dynamic, which has not only been the case at the NBP but throughout major European markets.
The last time the contracts were in contango was 2014, a year when the third quarter contract shed 13.1p/th from April to June.
One trader thought prices would not fall as far as that year, but that there was scope for a 5p/th decline to the mid-30s.
The contract closed at 41.0p/th on 31 March.
Another trader said: “If nothing bullish happens and there is a mild northern hemisphere summer with good hydro and no major outages, it may even get close, but it’s too early to say at this stage.”
There is some risk Asian demand for LNG rises, but the second trader added that was unlikely and that the region would need to experience extreme dryness and heat for a second consecutive summer.
The first trader added: “I would expect a similar situation this year. As you get closer to the delivery period there is more certainty on supply/demand and risk premium starts to come out of pricing. Everything is looking pretty healthy at the moment.”
In the years between 2014 and 2019, the value of the third quarter contract has not fallen more than 3p/th after April and actually gained over 10p/th in 2018.