September 2, 2014 / 12:49 PM / 4 years ago

UK gas prices at four-month high on tight supply, Ukraine concerns

LONDON (Reuters) - British wholesale natural gas and power prices rose to their highest in months on Tuesday, buoyed by tight supply and coming closer to prices for winter delivery on concerns of a Russian supply cut as a result of the Ukraine crisis.

The day-ahead contract opened at 51 pence/therm, its highest since April, before slipping back below 49.65 pence by 1155 GMT, reflecting an improved balance in the system.

Day-ahead baseload electricity prices in Britain rose to a near six-month high on Tuesday, gaining 45 pence to 45.25 pounds per megawatt-hour.

“On the back of a supply squeeze in the UK’s gas

system requiring counterbalancing storage withdrawals,

UK natural gas prices soared,” JBC Energy said in a research note on Tuesday.

Although Britain’s gas system opened slightly undersupplied on Tuesday, according to the National Grid, with forecast demand outpacing supply by around 5 million cubic metres (mcm), analysts said the resumption of gas imports from Norway over the Langeled pipeline, expected later on Tuesday, was putting downward pressure on day-ahead prices.

Langeled, which can shift 70 mcm per day, is currently shut for one day of maintenance.

Analysts noted the situation in Ukraine remained tense as EU leaders discussed new sanctions against Russia, a move that could affect European gas prices for future delivery.

“Any news that reads as a reduction in tensions will help ease the upward pressure on prices,” London-based Energy Aspects wrote in an emailed note.

“If talks provide little progress and tensions continue to escalate, the probability of a supply disruption will continue to grow, and prices should at the least retain current values.”

COLLAPSING SPREAD

Overall, British spot gas prices have risen by 40 percent since early July, mostly on concerns over Ukraine, but also due to rising demand as the market moves out of the low demand summer holiday season into the colder autumn months.

Meteorological data on Reuters shows average British temperatures typically fall from 15.2 degrees Celsius at the end of August to 13.6 degrees by mid-September, pushing up daily heating demand by around 20 percent, or 15 mcm.

With spot prices rising from around 35 to 50 pence per therm in the past month and gas prices for delivery during the upcoming winter 2014/2015 season relatively stable around 60 pence a therm this summer, the spread between the two contracts has fallen by over 50 percent to 11.5 pence per therm.

“What we’re seeing is the spot market adjusting to levels already seen in winter contracts, reflecting higher autumn and winter demand and the possibility of a Russian supply cut over the Ukraine crisis this winter,” one utility trader said.

To prepare for a potential gas disruption from Europe’s biggest energy supplier, European utilities have been injecting as much gas as possible into storage in the past spring and summer months, and the European Union is developing emergency plans to prepare for such a cut.

“We believe the Ukrainian situation will not be resolved without a transit interruption (and) prices would be likely spike,” said analysts at French bank Societe Generale.

Gas storage across Europe is around 16 billion cubic metres (bcm) higher than this time last year and 5 bcm above levels recorded at the start of winter 2013, Energy Aspects said.

Reporting by Henning Gloystein and Michael Szabo, editing by David Evans

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