December featured mild weather and another net stockbuild, making Q4 18 a full winter quarter in which each individual month posted net injections. As a result, UK storage inventories were 0.49 bcm higher y/y at year-end. The storage builds were thanks in large part to mild weather, with December HDDs down by 14% y/y, driving a 13% y/y reduction in LDZ demand. Against a weak demand side, supply remained buoyant, with domestic UK output up by 0.72 bcm y/y (mostly due to the base effects of December 2017’s Forties outage) and LNG sendout posting a 1.15 bcm (462%) y/y rise. Heading into Q1 19, the first week of January has posted below-average temperatures, although the monthly outlook is for a lower level of HDDs to prevail. However, even a return to normal weather will mean a y/y demand increase that will help tighten up what has turned into a comfortable NBP market. Still, unless weather forecasts shift towards being far colder, NBP prices are unlikely to need to rise to signal significant volumes of imports from the continent.
The NBP continues to face some diverse fundamentals over Q1 19. On the bearish side, our current forecasts for global LNG balances in Q1 19 are continuing to keep LNG supply to Europe (and by extension the UK) strong. The NBP balanced December’s low demand and high LNG sendout with big drops in imports from the continent. December’s net IUK pipe flows dropped off by 97% y/y, with new IUK capacity booking arrangements (see Europe Outlook: First Taste, November 2018) making the capacity charge more important in the decision to flow. Flows through the BBL also fell, by 36%. With the D+1 NBP premium to the TTF remaining narrower in y/y terms, averaging in December some 0.66 €/MWh compared to 1.78 €/MWh through December 2017, even imports of Norwegian gas were down, by 16% y/y. While Norwegian exports to Europe were down overall by 5% y/y (0.5 bcm), the drop in deliveries into UK terminals was even stepper, at 0.65 bcm y/y (16%).
The main bullish driver would be another cold Q1 19. Cold weather could certainly eat into the UK’s small seasonal storage surplus and could widen the NBP’s premium. As we mentioned above, though, the 30-day weather forecast suggests a deep freeze in January is not yet in the cards. While volatility in carbon and coal prices should be expected, TTF prices are trading at a seasonally low relative level, suggesting most of the risk is to the upside. The big caveat remains LNG takes. LNG imports have stayed very buoyant over Q4 18, and even a marginal premium over the TTF will keep cargoes coming to the NBP.
|Fig 1: NBP-TTF M+1, €/MWh||Fig 2: UK IUK flows, y/y, bcm|
|Source: Reuters, Energy Aspects||Source: IUK, Energy Aspects|
On generally normal temperatures through January, we are forecasting a modest increase in res-com demand of 2% y/y. We expect a 60% y/y increase in LNG supply, while Norwegian deliveries should begin to improve a little on December’s weak overall showing. Even if overall Norwegian production increases once teething problems at new field Aasta Hansteen are resolved, we do not expect any y/y increments in UK imports from Norway, with y/y reductions likely needed to help balance those higher LNG imports.
We do expect to see a net withdrawal from storage of around 0.3 bcm y/y, although that will still leave inventories comfortable at almost 1 bcm. Imports from the continent, especially through the IUK, will continue to drop. That will help support the net storage draw but does imply that the NBP D+1 premium to the TTF should stay at levels below what is needed to support large flows to the UK that would see the spread widen out to at least the 1.0 €/MWh (2.6 p/therm) commodity and reverse flow charges that would be incurred.
We stress that there are plenty of months left this winter. A prolonged cold snap during peak winter will widen the NBP premium above the TTF. 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 also widen out the M+1 spreads. While higher LNG receipts and storage levels have left the UK better able to handle short cold snaps without severe price jumps, NBP prices will go up if there is 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 stay at lower levels.