November 30, 2010 / 11:55 AM / 9 years ago

Could Britain's gas stocks run out this winter?

LONDON (Reuters) - The British gas market could be caught short this winter as an early cold snap sees suppliers tapping into storage a month earlier than last year, eating into stocks needed for when demand usually peaks early in the year.

Margaret and George Finlay clear away snow from their home, in Dunblane, Scotland November 29, 2010. REUTERS/David Moir

Wholesale gas traders started withdrawing from Rough — Britain’s only long-range storage facility — two weeks ago and supplies have been sinking since to about 17 percent below levels seen this time last year, data from network operator National Grid showed.

The premature and pronounced drain on the site under the North Sea, which holds the vast majority most of Britain’s back-up gas, could spell supply jiters early next year.

“If you do the numbers, storage will be empty some time in early February if it stays this cold,” said Jason Durden, energy trader at Energy Quote JHA.

Gas for delivery over the first quarter of 2011 has gained 12 percent since the onset of cold weather in the middle of November, according to one broker, and spot prices have nearly doubled in the last two months as temperatures have dived.

“If January and February demand is as high as it is now, storage will not be enough and prices will spike,” one British gas market analyst said.

Temperatures fell to a new record low for November over the weekend, Britain’s official weather forecaster, the Met Office said, while gas demand is around 25 percent higher than the same time last year, according to National Grid data.

The spot market’s premium over the first-quarter contract, around 1.45 pence on Tuesday morning, does not incentivise suppliers to hold gas in storage for later this winter.

Another gas market analyst expected withdrawals from Rough to drop by more than 10 percentage points over the coming two weeks if weather forecasts are consistent and assuming maximum withdrawals during the week and that weekend withdrawals will halve.

“Going into this winter with less-full storage and using it earlier could mean an uneasy time if we have a cold Q1,” he said.

COLD WINTER?

The Met Office expects temperatures in southern parts of Britain to become less abnormally cold in late December, although bitterly cold weather is expected to continue in northern parts of the country — keeping up pressure on storage to top up supplies coming in from the North Sea gas fields and liquefied natural gas terminals.

But beyond the end of 2010, latest forecasts by U.S. company Weather Services International are for temperatures in Britain to average warmer than normal in January and February, which could limit demand spikes and take pressure off stocks to help meet demand.

But exports to Continental Europe could also support demand for gas in Britain. European companies faced with relatively expensive Russian gas, linked to rallying oil prices, could buy in the UK — the biggest open gas market outside the United States.

Gas flows between Britain and Belgium via the Interconnector have intermittently switched to transporting gas into Britain since last week, after exporting gas from Britain for most of 2010.

But gas traders said supply from Belgium is uncertain this winter because the pipeline may be used for exports as buying British gas seems a good deal for continental European traders.

Rising oil prices, which tend to filter through to oil-indexed gas contracts months later, could further push up European gas prices over winter, driving up demand for spot gas from Britain.

But supply of liquefied natural gas to Britain has picked up over the past year with the expansion of import terminals near London and in south Wales, and gas traders expect plentiful supplies of the frozen fuel to help meet British gas demand peaks this winter.

Editing by Daniel Fineren

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