The UK, like much of Europe, has begun summer on a particularly bearish note. Unusually high stocks, an outlook for weak power sector gas demand, lower scheduled Norwegian maintenance constraints y/y in Q2 19, and a sizeable y/y increase in LNG supply all spell out a very loose supply-demand balance. All of these aspects became apparent by the start of Q1 19, but they crystalised by the middle of the quarter, as it became increasingly likely that no unusually cold weather events were going to tighten the supply-demand balance. NBP prices reacted to a loose balance by moving to a late winter discount to continental contracts, and we can expect those spreads to widen through the summer as the UK seeks to offload unwanted supply into Europe. Unlike other regions in continental Europe, the UK has little opportunity for coal-to-gas fuel switching this summer, so exports will be the only way to balance, especially once stocks become fuller. June and July are poised to be the months when exports will be greatest.
March provided NBP prices little respite from bearishness, as the mild weather that characterised much of the winter season prevailed over the month. UK consumption dropped by 1.9 bcm y/y in March and by a hefty 4 bcm over the whole winter. As we saw in February, the fall in gas prices did nothing to stimulate power sector gas demand (as gas was already in the money due to the carbon tax). Instead, higher power imports and brisk wind generation further pushed out all but 0.4 TWh of the 3.9 TWh of coal-fired generation produced in March 2018. The higher power imports were due to both higher y/y nuclear availability in France and new power flows coming through the Nemo Link, which connects the UK with Belgium. The jump in wind generation to a monthly record of 4.9 TWh (+1.2 TWh y/y) came on a combination of higher installed capacity (1.9 GW added in 2018) and a month of unsettled weather conditions. We expect to see power sector gas demand edge down y/y for the rest of 2019 due to partial displacement by power imports through Nemo Link and more renewable generation.
NBP prices tended to trade at a discount to continental equivalents to discourage imports in March, and we can expect that discount to widen this summer, with exports being the UK’s key balancing mechanism. UK gas storage finished winter with 0.63 bcm in stocks, up by 0.38 bcm y/y. With the UK having little storage capacity to inject into anyway—there is little seasonal storage capacity and only 1.54 bcm of full working gas storage capacity—the prospect of having even less net injection demand over the summer is not helping switch market sentiment.
|Fig 1: Wind capacity vs gas-fired generation, GW, TWh (RHS)||Fig 2: NBP-TTF D+1, €/MWh|
|Source: DBEIS, ELEXON, Energy Aspects||Source: Reuters, Energy Aspects|