LONDON May 25 British wholesale gas prices this
coming winter are seen unlikely to reach the peaks hit in
January due to more expected liquefied natural gas supply and a
weaker coal market but a lot depends on how far temperatures
plunge, analysts said.
In January, winter gas prices rose to around 52 pence per
therm, levels not seen since 2015 due to a number of factors.
An outage at Britain largest gas storage site Rough reduced
levels of gas inventories significantly; coal prices were high
and nuclear outages in France raised gas-for-power demand as
Britain was exporting more electricity to its neighbour.
UK winter 2018 prices are trading at around 46
pence per therm but are unlikely to reach the winter 2017
contract's peak in January unless there is a very cold winter.
"There is less upside than last winter. A lot depends on the
weather but two things are different - coal prices are lower and
the amount of LNG (liquefied natural gas) available," Massimo Di
Odoardo, VP of European Gas Research at Wood Mackenzie, said.
Part of what helped to sustain higher prices last winter is
that coal prices were at times above $90 a tonne but they have
retreated now to around $60 a tonne.
When coal is expensive, its main substitute natural gas
becomes more competitive for power plants to burn for
electricity. However, then demand for gas increases, thus
raising wholesale prices.
Deliveries of LNG were also quite sparse last winter.
"We expect more LNG coming between now and the winter,
possibly double the amount of last winter. That would limit the
UK gas spikes seen last winter," Di Odoardo said.
Analysts expect around 20 million tonnes of new LNG supply
to come online this year, some of which could come to Europe.
Last month, the outage at Rough was prolonged, with gas
injection not possible until the end of April next year. There
are also concerns in the market on whether it will be
Seasonal gas storage provides security and flexibility of
supply. At times of low demand and therefore low gas prices in
the summer, gas is injected into storage to be kept for when
demand rises in the winter.
Although European gas storage levels are relatively low,
supply routes are strong with a lot of gas available from Norway
and Russia, said Christopher Haines, head of oil & gas at BMI
"There is more than enough flexibility in LNG to cover any
outage issues at Rough. All this should keep gas prices pretty
subdued for much of 2017," he added.
BMI Research sees average UK gas prices at 44 pence/therm
this year, up from a previous estimate of 38 pence.
However, the impact of the Rough outage might not get priced
in by the market until the start of the winter gas season in
October, said Oliver Sanderson, gas analyst at Thomson Reuters.
"There are also more risks besides Rough," he said, such as
lower Dutch gas production.
This week, the Dutch government confirmed a plan to cut
production at the Groningen gas field by 10 percent from Oct. 1
to 21.6 billion cubic metres for the 2017-18 gas year due to an
increase in seismic activity in the area.
Groningen production would typically increase during the
winter months and fall in the summer to meet demand in the
"This January's (price) could be just an indication of where
winter prices could go this year and early next if it is a lot
colder than usual," Sanderson added.
(Editing by David Evans)