Brexit vote triggers uncertain outlook for European gas markets

 

European natural gas markets are set for a week of uncertainty as traders process the impact of the UK’s decision to leave the European Union.

On top of that, the Dutch government has proposed cutting the production cap for the country’s largest gas field, creating something of a perfect storm for European gas market participants to deal with.

The UK public voted to leave the EU on Thursday, marking the beginning of the end to the 43 year relationship. The news sent the British gas contract for next-day delivery and next-month delivery higher by about 1p/th, while prices in mainland Europe gas markets moved in the opposite direction.

British NBP gains came as sterling slumped to a 31-year low against the dollar and was more than 6% down on the euro. This has provided euro-backed traders with an incentive to buy sterling-denominated contracts, which helped to bolster NBP products. The vote, which came as a surprise to many participants, kicks off a period of uncertainty for the British energy market and economy as a whole.

In the short term, the result will likely be bullish for the British gas market due to the depreciation in the pound.

Another impact of the vote has been a weakening of the oil benchmark, Brent crude, which fell by over $2.00/bbl on Friday morning. Bearish oil can drag down British NBP gas contracts due to the prevalence of oil-indexation in some long-term supply deals in mainland Europe.

Adding further uncertainty to the already volatile markets, traders found out on Friday afternoon that the Dutch government has proposed to reduce the cap for Groningen gas production by 11%, but with a provision to increase the cap in emergencies. Another fundamental factor that has impacted supply and demand in the British gas market has been an unexpected announcement that the Rough storage site will come offline for 42 days.

The announcement, which was made late Wednesday afternoon, has provided extra pressure on NBP prompt prices. This has been because shippers usually inject gas into storage during the warmer summer months. The reduced demand to fill the site could create a supply glut throughout July.

ICIS has followed the lead up to the referendum and is now providing up-to-date coverage of the developing situation in the aftermath of the decision.

ICIS graphics and news output help readers assess the situation as it develops across multiple products.

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Podcast: ICIS discusses the week's energy news highlights

Energy markets have been volatile this week because of the UK’s EU referendum as well as fundamental supply factors at the Rough natural gas storage site and Groningen production field. ICIS experts Ben Lee and Thomas Rodgers discuss the implications of the Brexit vote and what price drivers we can expect in the near term.

Click here to listen

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