The UK ended July with storage at 78% capacity, leaving just 0.4 bcm of capacity to fill. Heavier Norwegian maintenance y/y should cut August–September pipeline flows to the UK, but the steep contango in the NBP near-curve will probably keep injections brisk. The UK is likely to fill storage before the end of summer, eliminating a main outlet for supply above domestic consumption. This lack of injection demand would leave the NBP reliant on exports to the continent to balance well into November. NBP prices will have to hold sufficiently weak against continental contracts to encourage these exports, but continental hubs are also being pressured by a lack of injection demand as sites fill.
July was the first month this summer to see a y/y turndown in Norwegian supply to Europe (-1 bcm) owing to higher maintenance constraints. The slowdown in UK deliveries accounted for most of the loss (-0.6 bcm). The decrease in pipeline supply was only partly offset by a 0.27 bcm y/y rise in LNG sendout, while UK domestic consumption edged up by 0.16 bcm (5% y/y). This left the UK market tighter y/y so that IUK exports to the continent slowed substantially (-0.9 bcm, 64% y/y). That said, NBP D+1 prices closed at a discount to August and September contracts on most days, encouraging quick injections of 0.4 bcm (+71% y/y). As a result, UK stocks began August 0.23 bcm higher y/y, with just 0.4 bcm of empty capacity.
With such limited storage capacity, the UK will rely on IUK exports to balance the rest of Q3 19. Our demand forecast for August–September remains unchanged; we see very small y/y rises in power sector gas demand owing to outages at the UK’s 1.1 GW Dungeness B, and the 500 MW Hunterston B nuclear plants will be offset by a small September uptick in res-com demand. Q3 19 incremental LNG will fall from Q2 19’s +3.5 bcm to a mere +1.0 bcm. Higher y/y LNG supply will be comfortably offset by a drop in pipeline supply this month, leading the UK to slow exports to the continent again, but since the contango in the curve supports storage injections, UK stocks should come close to capacity by end-August. Even with lower pipeline receipts, the UK will still need to raise IUK exports y/y to balance in September, although IUK flows should remain well below capacity that month.
NBP contracts for delivery in September–October will then need to hold at either a discount to continental hubs or a premium that is smaller than the UK’s commodity charge to maintain strong exports in the period. We argued last month that NBP contracts for near-curve delivery should weaken against the TTF this summer, despite pressure on near-curve contracts in Northwest Europe from lack of remaining injection demand as well. Gas consumption in the region could also be curbed by early warm weather in the shoulder season, suppressing the need for heating. The UK Met Office sees above-average temperatures for August–October.
|Fig 1: NBP D+1 bases, €/MWh||Fig 2: NBP-TTF Oct basis, p/th|
|Source: Refinitiv, Energy Aspects||Source: Argus Media Group, Energy Aspects|
Struggle to absorb supply
The battle of the glutted markets looks set to continue into winter. The NBP and TTF prompt markets will have some respite from downward pressure because of heavy Norwegian maintenance during September, but the ramp-up in Norwegian flows in October will leave the UK amply supplied. Strong IUK flows could be needed for the market to balance. The NBP-TTF October basis is already much tighter y/y; it has closed negative on most days so far this month.
We expect the UK not to need continental imports through much of the 2019–20 winter, assuming normal weather and the start-up of new Norwegian production from the Johan Sverdrup, Snefrid Nord, and Utgard fields in Q4 19. Combined with incremental supply from the Aasta Hansteen field, strong Norwegian supply and a continued y/y increase in LNG supply should leave the UK balancing without continental imports, except in January 2020, when we forecast imports of 1.2 bcm (flat y/y). The lack of UK demand for continental gas is reflected in limited IUK capacity bookings, with little uptake of Q4 19 IUK capacity—just 113 GW/d booked via Prisma and the implicit allocation mechanism (IAM) to date. Interest in Q1 20 capacity has been greater, with 184 GW/d of capacity booked so far.