UK consumption plummeted by 1.5 bcm in February, the largest y/y decline since April 2014. While last month was the mildest February in well over 10 years, it is compared y/y against an exceptionally cold February 2018. While res-com demand was low last month, falling prompt prices did little to help stimulate power sector gas demand, with the month logging a 40 mcm y/y decline in gas burn in power. Gas-fired generation was replaced by stronger power imports and record-high wind generation. With UK gas in storage set to finish March roughly 0.25 bcm higher y/y, the UK will need to balance over summer by exporting more to the continent, and that means the NBP will need to trade at a deeper and sustained discount to the TTF. Indeed, the NBP-TTF D+1 basis has already gone negative on some days this month and the UK could make some small late winter exports through the IUK pipe on the mildest days.
A significant reduction in LDZ demand was likely anticipated by the market, but last month’s big drop in power sector gas demand may have been more surprising given both February 2018’s high coal-fired output and the fact that falling gas prompt prices should have strongly incentivised coal-to-gas switching. Instead, gas-fired output fell by 0.6 TWh (6%) y/y, as thermal generation was replaced by more French and Belgian power imports and rising renewable generation. While coal lost what market share it had, further power reductions came from gas.
The headwinds to getting more gas into power in the UK will continue this summer. The NBP has softened against the TTF due to rising UK imports of LNG, but the UK’s limited summer injection demand and limited opportunity for coal-to-gas fuel switching will leave the British hub more heavily reliant on balancing through exports to the continent. Given expectations of a negative NBP-TTF spread for most of summer, Norwegian and LNG supply could be increasingly incentivised to head to the continent rather than the UK. However, if there are commercial (regas capacity contract limits) and physical limits on increased flows to the continent from Norway and LNG, any surplus build-up of gas in the UK will be exported to the continent through the IUK and/or BBL pipes (when reverse flow capacity becomes available in mid-summer). So, the UK gas market will balance either with high LNG imports coinciding with high exports to the continent, or more moderate LNG imports and moderate gas exports to the continent. Either way, the NBP will need to trade at a more consistent and wider discount than seen previously.
|Fig 1: EU fuel-switching at the prompt €/MWh||Fig 2: NBP-TTF D+1, €/MWh|
|Source: Reuters, Energy Aspects||Source: Reuters, Energy Aspects|