LNG Markets Analysis: High UK prices bring spot cargoes

05 March 2018 14:34 Source:ICIS

The LNG market enabled the UK to balance gas supply and demand during last week’s extreme cold weather, which led to high prices, and the system operator National Grid issuing a “gas deficit warning.”

Flows of LNG already stored in the UK’s regasification terminal tanks rose in response to the market conditions, bringing the system back into balance.

Traders then appear to have arranged for replacement volumes to head to the UK to replenish the storage volumes over the following week.

Two spot cargoes from Russia are heading to the UK and one from Norway, with the volumes likely to stay in the UK, although it cannot be ruled out that they could be reloaded from the UK onto another ship at a later date.

However, the circumstances of this winter were favourable for the availability of spot supply at short notice, which could not always be relied upon in the future.

Gas warning spurs high LNG sendout

Unusually cold weather boosted UK gas demand late last week to levels over 400 million cubic metres (mcm)/day, with demand on Thursday 1 March at 418 mcm, compared with an average during January-February this year of 332 mcm.

Continental Europe was also facing cold weather and high demand, limiting its ability to flow gas to the UK through interconnector pipelines.

Combined with a number of offshore production problems, including from Norway, and the closure last year of the UK’s main gas storage facility at Rough, this left the UK struggling to find enough supply to meet demand.

As a result the system operator, National Grid, issued a “gas deficit warning”. This alert is a message to traders to look for new supplies to bring to market and also encourages consumers, such as major power generators or industrial sites, to consider switching to alternative fuels.

It does not normally indicate any immediate threat to household supplies. In the event of the market failing to respond, National Grid would first cut supply to factories and power plants before there was any impact on households.

Prompt gas prices jumped to 20 year highs, with ICIS recording within-day gas trades up to 350 pence/therm (p/th) on 1 March. The average Day-ahead UK gas price assessed by ICIS during January-February was 54.44 p/th.

This high Within-day price was equal to over $48/MMBtu, compared with the recent average ICIS East Asia Index price assessed for spot deliveries to Japan and South Korea in March of $10.41/MMBtu.

LNG flows were crucial to bringing the system back into balance.

Flows from the UK’s Dragon, Grain and South Hook LNG terminals leapt higher, reaching a combined 85mcm on 28 February and 62 mcm on 1 March, compared with a 9 mcm/day average across January-February.

LNG terminals can respond immediately to market changes from volumes already in store in terminal tanks. However, the length of time for which they can sustain this response depends on how much volume they have in store, and how swiftly they can bring in new cargoes to replenish stocks.

By 2 March, combined stocks at UK terminals were the equivalent of around 266 mcm of pipeline gas, meaning they could only have continued to flow another three to four days at the high rates they had been producing before they would run out of stocks, unless new cargoes were brought in.

New cargoes secured

The UK has been receiving very few deliveries of LNG this winter.

Since the start of 2018, one Russian LNG cargo was delivered to Dragon LNG on 19 January and one Qatari cargo to South Hook on 22 February.

Market intelligence platform LNG Edge indicates that a number of cargoes are now heading towards the UK to refill terminal tanks.

The 174,000 cubic metres (cbm) Maran Gas Ulysses, shown in a green box in the bottom left of the picture, has picked up a Russian Yamal LNG cargo in a ship-to-ship transfer at Montoir in France and is now indicated by port data to be heading to Dragon LNG in Wales for 7 March.

The 148,000cbm Arctic Princess from Norway, shown in a blue box in the centre of the picture, has recently departed from Hammerfest LNG and is broadcasting a heading to the Isle of Grain for 8 March. Grain is in Kent, and boxed in red on the map.

The 172,000cbm Eduard Toll, in a red box at the top right of the picture, has left Yamal LNG and is also heading to Grain, for 13 March.

It is likely that these cargoes were all bought in the spot market to refill UK terminal tanks after the high send-out last week.

It cannot entirely be ruled out, however, that the volumes delivered to the Isle of Grain could be stored in the terminal tanks there, then later reloaded back out onto another ship for delivery elsewhere.

There could also be additional Qatari volumes heading towards the UK, but as yet there are none confirmed by port or ship signal data.

High prices bring cargoes but...

The cargoes from Norway and Russia can reach the UK within a week or two’s travel, whereas they would take around a month to voyage to Japan or South Korea.

For these cargoes delivering into the UK market at a time of high prices could be more profitable than travelling to the usually premium market of east Asia.

During the gas deficit warning, immediate delivery prices spiked up to $48/MMBtu, while next-week prices for the week starting 5 March reached around $10/MMBtu.

Traders who sold at $48/MMBtu could make a high profit, then replenish stocks. But even planning a next-week delivery at $10/MMBtu would have been more profitable than spending a month travelling to Asia, arriving around April. The ICIS East Asia Index price for April was $8.45/MMBtu on 1 March.

So the response to high prices enabled extra supply to be brought to market, balancing the gas supply/demand position.

But the UK was perhaps fortunate that Russia’s Yamal LNG plant is still in its initial start-up phase, having begun production late last year.

Its cargoes are not expected to be dedicated to long-term contract deliveries until April 2018, meaning that they are available for last-minute sales in the spot market. If it had not been for the recent Yamal LNG start-up, there might not have been immediate spot market cargoes available for UK traders to buy.

Companies who have long-term contracts to supply LNG to end-users will prioritise their long-standing customers at times of shortage, particularly if they have a decades-long relationship with a credit-worthy company like a Japanese utility.

If traders cannot arrange a replacement, they would be unlikely to disrupt supply to a long-term customer to divert a cargo to fill a short-term position elsewhere.

Availability of short-term cargoes in the Pacific Basin is currently limited due to an ongoing outage at Papua New Guinea’s production facilities.

So, while the LNG market was able to respond to last week’s deficit, the situation could have proved more difficult, or costly to manage, if the country had suffered a longer-lasting cold snap that continued to drain stocks, or if there had not been surplus volumes available due to the current position of Russia’s Yamal project. alex.froley@icis.com

By Alex Froley