UK LNG sendout hit a record high of 2 bcm in May, contributing to the crash in NBP prompt prices across the month. We expect incremental LNG supply of 1.3 bcm (+130%) y/y in Q3 19, although there is both upside and downside risk to that forecast. The LNG numbers depend on the strength in Asian demand in Q3 19 and further global oversupply potentially closing the Aug-19 and Sep-19 TTF-Henry Hub arb, which could prompt LNG offtakers to halt late summer US cargo loadings into Europe. For winter 2019-20, we expect strong LNG and Norwegian supply will leave the UK well balanced through all but the peak demand months, leaving the UK to make net exports through the IUK pipe until January 2020, suggesting a sustained period of NBP discounts to the TTF.
Cooler weather y/y boosted UK demand in April and May, but Q3 19 is likely to see a shift back to y/y aggregate demand losses as we return to seasonally normal weather and power imports from Belgium and France cut UK thermal demand. We expect UK power sector gas demand to be flat y/y over September-December, however, as there is very modest scope for UK coal-to-gas fuel switching if continental power imports do not fully offset coal-fired output.
Although we have revised up our expectation for incremental LNG supply into Europe in Q3 19 by 2.6 bcm since last month, our expectation for incremental UK LNG takes in Q3 19 remains unchanged at 1.30 bcm y/y. A loose supply-demand balance leads us to expect IUK exports close to capacity in July and most of August, leaving the UK with little room to take more supply, especially now that Total confirmed last week that the 4-5 bcm/y UKCS Culzean field will start up imminently. Although there is some room for the UK to take more incremental LNG in September, proportionally more LNG should to go to the continent as we expect the NBP to drop to a discount to the TTF as we move through the summer.
Come winter 2019-20, ample global LNG supply and much higher Norwegian flows—spurred on by new Norwegian production—will keep the UK well supplied, indicating that the UK will not need continental imports except during peak winter (January-February). The NBP Q4 19 contract is still trading at a premium to the TTF, but we expect that basis to continue narrowing, especially once the market has more clarity on the expected start-up of the Johan Sverdrup and Snefrid Nord fields, which are currently scheduled to come online in November and December, respectively.
|Fig 1: Change in LNG sendout y/y, bcm||Fig 2: French nuc. gen. vs power exports, GWh, y/y|
|Source: National Grid, DBEIS, Energy Aspects||Source: ELEXON, RTE, Energy Aspects|