The UK gas market has been on a downtrend throughout the year after a mild winter left storage facilities entering summer already at high levels. Qatar has also kept up a steady flow of LNG cargoes throughout the year, sending daily gas prices down from the mid 60s pence/therm in January to the lowest point of the year at 34.60 p/th on July 11.
But the market now seems to have turned 180 degrees, with a sharp jump in prices since mid-August. With higher winter demands on the way, July’s lows may not be seen again this year.
The prompt gas market has looked more bullish since mid-August on the back of cooler weather boosting heating demand and lower LNG sendout from the South Hook LNG terminal.
The day-ahead gas price broke back over 40 pence/therm on August 14, and was trading at 43.50 p/th Thursday August 28, up by 16% from the average 37.52 p/th day-ahead price recorded for July.
Some unusually cold weather in the last couple of weeks, including reportedly the coldest ever August bank holiday on Monday August 25, has combined with lower LNG sendout to pull spot prices higher.
Local distribution zone gas demand, mainly for heating from homes and businesses, has averaged 69 million cu m/day during August 18-26, and 60 million cu m/day across August-to-date as a whole. That puts August up 13% from the 53 million cu m/day LDZ heating average seen during July this year and also recorded for August 2013.
Meanwhile, LNG sendout into the UK’s national gas transmission system has dropped to an average of just 30 million cu m/day over the four days August 23-26, compared with an August-to-date average of 43 million cu m/day, and a July average of 44 million cu m/day.
The turn-down in the amount of LNG reaching the UK’s gas network has come despite continued arrivals of Qatari tankers unloading liquid LNG into the South Hook terminal’s coastal storage tanks. The Mekaines tanker is unloading currently, while the Al Ghuwairiya is expected to unload a cargo next Monday.
The UK gas market remains at a discount to the Asian market. UK September gas closed Wednesday at $7.00/MMBtu, compared with the Platts Japan Korea Marker for Asian spot LNG at $11.80/MMBtu for second-half September.
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Middle East producers such as Qatar have roughly equal shipping distances to Europe or Japan, and so would theoretically get a better return from selling into Japan. However, as the world’s largest producer, Qatar has enough volume to sell into Japan and other markets, and the UK is a convenient market to dispose of surplus LNG, with its liquid trading hub, and since Qatar owns a stake in the South Hook terminal.
Power generation demand for gas has been more constant over the month, although showing regular dips at the weekends, when electricity use is lower.
The big change in power plant consumption is on a year-on-year basis. The average 47 million cu m/day gas use seen during August-to-date this year is up 57% from a 30 million cu m/day average power plant consumption in August 2013. Power plant use has shown a year-on-year increase every month from May onward this year, as falling gas prices became more competitive against coal.
The higher power generation this year has offered some support to gas prices that might otherwise have come under even greater pressure this summer.
The UK market has also been supported this year by higher exports to Belgium. UK flows through the Interconnector pipeline to Zeebrugge have averaged 17 million cu m/day during August-to-date, compared with only 5 million cu m/day during August last year.
Last year the UK would have needed to keep more gas at home to refill its storage facilities after a cold winter that left them almost completely drained in early April 2013. However, high UK stock levels this year are allowing the UK to export more gas to the Continent, where French and German storage facilities, although higher than last year, still have some spare capacity available.
But despite the recent increase in spot gas prices, the current prompt market in the low 40s p/th remains much lower than the average 67.99 p/th day-ahead price recorded across 2013 as a whole.