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UK gas prices to remain elevated this winter, prone to spikes
October 12, 2017 / 12:38 PM / 2 months ago

UK gas prices to remain elevated this winter, prone to spikes

LONDON (Reuters) - British wholesale winter gas prices this winter should remain at the elevated levels seen so far this year due to high coal prices, uncertainty about French nuclear outages and low storage inventories.

FILE PHOTO: A gas cooker is seen in Boroughbridge, Britain, November 13, 2012. REUTERS/Nigel Roddis/File Photo

Early this year, winter 2017 gas prices rose to levels not seen since 2015. The winter 2018 contract is currently trading at around 49 pence per therm and analysts expect it to average around 48 p/therm.

Price spikes in the wholesale gas market, if prolonged, can have a knock-on effect on retail gas prices for households. There is pressure on utilities to lower consumer prices. The government set out draft legislation on Thursday for a price cap which would last until 2020.

National Grid said in its winter 2017/18 outlook earlier on Thursday that Britain can meet electricity demand this winter.

However, analysts say that the gas market is not as relaxed about this winter as the grid operator.

This is due to lower-than-expected nuclear output in France which has raised demand for gas there, high coal prices of around $90 a tonne, low gas storage levels and uncertainty about liquefied natural gas (LNG) deliveries.

“North-west Europe may struggle to balance if the winter sees an early cold snap or infrastructure outages and concerns over French nuclear outages continue to spook the market,” said Simon Wood, gas analyst at S&P Global Platts.

“The reality is the risks this winter are greater than ever. The loss of Rough (gas storage site), low storage stocks across the Continent and Chinese LNG spot buying driving JKM, the global LNG benchmark, to record levels,” he added.

European physical coal prices are around 20 percent higher than in October last year. 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.

“Coal prices have been very robust this year and have been climbing rapidly into the winter months as well. We’ve been playing catch-up with coal prices,” said Murray Douglas, research director of European gas at consultancy Wood Mackenzie.

“There are temporary support measures for gas but (they) won’t continue to the end of next year,” he added.

VOLATILITY

During the summer, gas prices were volatile after Centrica’s decision to close Rough due to safety issues amid a prolonged outage.

The loss of 70 percent of Britain’s gas storage will be partly offset by increased gas imports and the sale of some so-called cushion gas from Rough through the end of Q1.

But prices could spike in the event of very cold periods and nervousness about further production outages and Russian gas flows, traders said.

“Some gas coming from Rough might give the markets some respite. Barring any extreme cold spell or severe disruptions in say France I cannot see a very tight winter but the market is quite irrational of late,” said Wayne Bryan, analyst at Alfa Energy.

Last year, several French nuclear reactors were halted for safety inspections by regulators, creating a power supply shortfall which Britain helped to balance through exports.

That meant there was more demand for gas from power plant operators in Britain to help balance the domestic market, supporting gas prices.

Although there is more French nuclear supply than last year, a number of reactors have had their restarts delayed, adding to tension in the market.

“There has been a reasonable level of Norwegian outages and there’s a much higher level of (French) nuclear power plant outages than we expected there to be. Those outage levels are very high at around 25 GW,” said Trevor Sikorksi, head of natural gas, coal and carbon research at Energy Aspects.

    “We have seen a lot of delays to plants restarting over the last few months. In October and November we could see similar levels of nuclear outages and again that could lead to reasonably low (power supply) levels so there could be a repeat of what we saw last year,” he added.

There is also uncertainty about the amount of LNG Britain and north-west Europe will receive this winter.

In Spain, southern France and Italy, wholesale gas prices are trading at steep premiums to north-west European hubs, due to concerns over LNG supply this winter as low hydropower levels have made the region more reliant on imports.

But prices are still lower than Asian LNG prices, meaning that cargoes could continue flowing to the East due to strong Chinese demand.

Although LNG stocks at Britain’s Isle of Grain, Belgium’s Zeebrugge and Gate in the Netherlands are well stocked, traders assume most of that volume will be shipped to Asia.

Additional reporting by Oleg Vukmanovic, editing by David Evans

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