Weather-driven NBP prompt upside possible in week 13

Author: Arun Toora

2020/03/23

• Temperatures across NW Europe to tumble in week 14

• British local distribution zone demand to increase

• EAX-NBP premium gaining

LONDON (ICIS)--Incoming cooler weather across Britain for week 14 could encourage buying across NBP prompt and near curve contracts in the coming sessions. The drop in temperatures will likely trigger a spike in heating demand which has also increased due to large numbers of people working from home to curb the spread of the coronavirus.

But falling industrial and power sector offtake would likely truncate prompt gains.

Updated weather models on Monday morning indicated that cold air plunging down from the north will dent temperatures from 27 March onwards.

“I reckon another 2 to 3 weeks of relative cold, with frosts, mainly north and easterly pattern,” a meteorologist at MetDesk told ICIS.

Temperature anomalies across the UK is set to range from -2 to -3°C below the seasonal average in week 14.

With up to 70-80% of British homes still heated off gas, the wholesale price is particularly sensitive to temperature variation.

Despite this, traders largely shrugged off the weather signals during early Monday trade, largely taking direction from bearish carbon which was down 10.5% at 12:00 London time.

The NBP Working-Days-Next-Week contract was dealing at 22.2p/th, 1.3p/th below its close on 20 March.

Residential gas offtake in Britain was up 9.8% year on year since the start of March as of the end of working week 12. This was largely driven by the shift in people working from home and not in offices.

Residential consumption is expected to be high on the combination of cooler weather and people staying at home. This could feed strength into the near-curve as week 13 progresses.

However sharp drops in industrial and power demand due to the closure of businesses would likely cap any strong upside.

During week 12, power demand averaged 30.45GW, down 10% of the five-year average, according to National Grid.

Monday electricity demand was forecast at 29.2GW.

MOVING INTO Q2

Beyond week 14 and into the second week of April models from the European Centre for Medium-Range Weather Forecasts (ECMWF) showed a return to more average temperatures.

“I think we’ll go milder to warmer during week 15 and overall I still think a mild April is more likely,” the meteorologist added.

The NBP April ’20 and the equivalent UK power baseload contract were trading 1.6% and 2.3% down respectively during Monday morning compared to the close on 20 March.

On the supply side, LNG flexibility will be a key driver with three Qatari cargoes expected to unload during the first week of April.

However, a pick-up in spot LNG demand in Asia has opened the east-west arbitrage up which could tempt LNG sellers into the Pacific basin.

Most deals would have been completed for April but looking at May delivery, the East Asia Index (EAX) premium over the NBP was $0.8/MMBtu on 20 March, $0.42/MMBtu higher than the year to date average.

If the appetite to ship more cargoes into Asia increases, then a drop off in supply into Europe could support near-term contracts.