The UK began October with very low gas stocks, and we expect market participants will look to increase the pace of injections over the month. High injections will occur against a background of expected higher y/y res-com demand, although some of that demand growth may be offset by lower power sector gas demand. With LNG imports set to remain reasonably low this month, the UK market will balance through lower exports to the continent, which suggests a wider NBP premium to the TTF.
The UK is again starting winter with a storage level that is crying out for injections, as September saw net withdrawals of 0.26 bcm, taking the start of October balances to 0.82 bcm, just 54 mcm higher y/y. October 2017 saw a net build of 0.40 bcm, which took end-October storage levels to 1.17 bcm followed by a peak of 1.22 bcm on 6 November 2017. That storage build in October 2017 coincided with a period of mild weather, but the UK is going to need a similar build this October if it is going to head into November with a similar level of gas in its storage facilities as last year. We note that it is not all that unusual to see 0.1 bcm/d builds in aggregate at UK facilities, so only a few low-demand days will be needed for injections to be on par with October 2017. We think that by the time withdrawals begin in earnest—roughly around early November—we should be closer to the UK’s total storage capacity of 1.4 bcm.
September saw a net withdrawal of gas from storage, which is becoming something of an annual habit for the market. Slightly worrying is the fact that the withdrawal came despite UK gas consumption falling sharply, due to a notable 0.44 bcm (10%) y/y drop in power sector gas demand. That decline in power sector gas demand stemmed from a period of relatively unsettled weather (which pushed up wind power generation by a considerable 1.1 TWh y/y), a reduction in overall power generation and some evidence of increased coal-fired generation. The fact that NBP prices surged to levels that encouraged gas to coal switching amid a September with relatively low gas consumption reflects just how tight the market was.
We think NBP prompt prices are likely to remain supported by fundamentals over October. Weather forecasts project that HDDs over the next 18 days are going to be 9% higher y/y, while the market will be looking to prioritise gas for injections into storage. Power sector demand will be weather sensitive, but higher imports of power from France and unsettled weather supporting wind could provide similar headwinds to those observed last month.
As we move into November, total UK gas demand should ease assuming a return to mean weather, owing to the high HDD base from winter 2017/18. Milder weather y/y and higher French nuclear capacity (provided units return as scheduled) should ease UK power sector gas demand this winter. However, some support would occur if Nordic hydro levels remain low, which would curb continental power exports to the UK, and if outages at both UK and Belgian nuclear power plants persist.
In terms of supply, UKCS deliveries should be higher y/y in Q4 18 owing to a production boost in December given the Forties outage that cut UKCS supply in December 2017. The volume of Rough supply into the market should fall y/y. LNG supply into the UK will also continue to post y/y declines until early summer 2019 owing to strong Asian LNG demand, although a mild Asian winter could soften the y/y drops once we get to Q1 19. Outside of October and possibly January, lower res-com demand should mean the UK needs to import less continental gas this winter, and that could narrow the NBP-TTF basis y/y. However, the NBP is a market running with little flexibility and any extreme cold periods will result in spiky prices and potentially very wide spreads to the TTF.
|Fig 1: NBP D+1, p/th||Fig 2: UK LNG sendout and forecast y/y, bcm|
|Source: Reuters, Energy Aspects||Source: National Grid, Energy Aspects|