LONDON (ICIS)--On 5 November Britain will likely return to a national lockdown to fight the spread of the coronavirus, however a winter lockdown will likely prevent the demand loss seen earlier in the year.
To compare the first lockdown to the approaching one would be comparing apples to oranges.
In lockdown 1.0 (LD1), several bearish factors accompanied the widespread closure of schools and non-essential businesses.
Firstly, LD1 happened to come into place across bank holidays, including the Easter bank holiday on 12 April, which showed a much more substantial drop to demand than the initial closure of businesses did.
As well as this, LD1 also began at the end of the gas winter, when temperatures are on the rise and heating-based demand, by far the largest any of gas demand in Britain, was already set to decline. In fact, May itself was an abnormally warm and sunny month.
These two elements compounded the fact that wind and solar output was also high, depleting gas-fired power demand as cheaper renewable power took precedence on the British power stack.
One important piece of data from LD1 was that industrial demand, although only accounting for roughly 5% of total British gas demand, stayed incredibly consistent.
Overall, the impact on demand wasn’t solely due to the conditions of a lockdown, but instead a lockdown alongside other, important demand-impacting events.
The approaching lockdown 2.0 (LD2) is now happening well into winter months, when heating demand is on the rise, continuing to do so well into the first quarter of the new year.
This means that a new lockdown which forces widespread working from home could well sustain overall demand as heating is relied upon across the day in people’s homes – compared to a business as usual month of November when the majority of people would have been at work.
Power and local distribution offtake may well come into play as businesses are forced to close however.
National Grid’s winter outlook reviewed demand scenarios given a widespread lockdown and found that if business and industry were forced to ramp down, peak demand would drop by just 6% under the harshest of lockdowns.
According to prime minister Johnson’s briefing on Saturday 31 October, schools, another demand basin for both power and gas offtake, are set to remain open.
As well as this, it seems as though not as many businesses will be pushed to close.
Another substantial difference between the first and second lockdowns will be supply. At the time of the first lockdown back in March, LNG supply was continuing to hit record highs.
March loadings in Britain totalled 37% more LNG than the previous year, while in April total LNG delivered rose by 7% year on year.
Despite total LNG deliveries still almost 14% up from 2019 levels over the gas summer, the progressive curtailment of US cargoes has begun to show effect into the gas winter.
In September, deliveries were 45% below 2019 levels, while in October this difference widened further to 56%, meaning Britain is entering a new lockdown with far less LNG supply than the first.
Although Asian prices remain strong and are likely to draw the majority of LNG cargoes, there is a chance that increasing US supply into the colder winter months could send additional cargoes to Europe.
On 31 October, feedgas to US LNG plants on the Gulf Coast rose to an all-time daily high.
MIXED MARKET RESPONSE
Ahead of the lockdown announcement one NBP trader said that they foresaw increased heating demand supporting prices, however noted that power demand if businesses were to close would take a hit.
Following Saturday’s announcement, early trade on Monday 2 November showed a plummeting NBP front-month price, with one trader attributing the drop to lockdown. December ‘20 then settled 1.6p/th below Friday’s close.”
Although the picture shows steady potential demand alongside lower supply, the UK government is yet to solidify the exact shape of LD2.
Moreover, the duration of the lockdown is being brought into question, which could be leading to a sell off for December volumes while the market gains more certainty.