Another month of mild weather and a robust y/y increase in LNG supply led to a further loosening of the UK’s supply-demand balance in November, leading the country to post an unusual net stockbuild in a winter month. The NBP is facing some reasonably diverse fundamentals over Q1 19. On the bearish side, consensus forecasts for more mild weather in Asia in Q1 19 and higher global LNG exports suggest that LNG supply to the UK will remain strong. The y/y decline in pipeline supply that was sustained in Q4 18 should also begin to ease, as Norwegian flows should get a boost from the long-awaited start-up of the 8 bcm/y Aasta Hansteen field. The main bullish call is for a growing consensus that Q1 19 is going to be cold in the UK while volatility in carbon and coal prices are likely to drive up the TTF, moving the NBP with it.
With current forecasts calling for higher temperatures y/y through December, UK demand should remain weak this month, further preserving limited stocks and relaxing the UK’s supply-demand balance. In addition to a continuation of the hefty y/y increase in LNG supply, Norwegian deliveries to the UK should receive a boost from the expected start-up of the 8 bcm/y Aasta Hansteen field before year-end. We expect a continuation of limited imports from the continent via the IUK pipe, with the UK balances looking comfortable without drawing on NW European storage.
Still, there are plenty of months left this winter, and there does appear to be a growing consensus from weather forecasters that Q1 19 will be colder than normal in the UK. A prolonged cold snap during peak winter will push NBP prices above the TTF, even if the coming quarter is milder y/y. With UK storage having the propensity to empty quickly—even with higher LNG supply—gas will be called through the IUK pipe, and the higher IUK capacity charges this winter will particularly widen out the M+1 spreads. While higher LNG receipts and storage levels have left the UK better balanced to handle short cold snaps without severe price jumps, it will see prices go up on a long period of modestly colder-than-normal weather—which Q1 19 might just well offer. Of course, if we move through January without any high-demand weather events, NBP prices will seek lower levels.
|Fig 1: NBP M+1, €/MWh||Fig 2: UK LNG supply and forecast y/y, bcm|
|Source: Reuters, Energy Aspects||Source: DBEIS, Energy Aspects|