UK gas prices below oil-linked supply for first time since Oct 2020

Wholesale natural gas prices on the British NBP virtual-trading hub have decisively broken below the value of long-term, oil-indexed supply contracts for the first time since October 2020, according to an analysis of S&P Global Commodity Insights pricing data, following weeks of firm support from this market indicator.

With Europe's energy crisis still latent in the market, a requirement to maintain all available supply sources at high levels following steep cutbacks in pipeline exports from Russia could have sustained the wholesale market above the oil equivalent, lest any decline below it compromises these alternative supplies with a spot-market preference.

Platts, part of S&P Global Commodity Insights, assessed the average month-ahead NBP contract for April delivery equated to $13.257/MMBtu during its tenure as the front month, while the month-ahead NWE oil-indexed Gas Contract Indicator (GCI) was assessed at $13.593/MMBtu for April delivery. The Dutch TTF equivalent held above both at $13.782/MMBtu.

Moreover, the NBP prompt also fell below the long-standing support level of 100 pence/therm on April 19, with the balance-of-month and May contracts assessed at 95 p/th ($11.82/MMBtu) and 95.025 p/th, respectively. The GCI came to $12.911/MMBtu for May delivery, demonstrating a clear breach of both fundamental and psychological support.

As a function of gasoil and fuel-oil prices, the GCI month-ahead uses assessment data between two and seven months ago, mimicking the typical time lag and catchment window for oil-indexed supply. The resulting indicator results not only in an accurate marker for oil-linked supply, but also a level just below the oil-equivalent price if the energy content of oil was traded as natural gas.

Traders have noted how wholesale natural gas prices appear to have found a floor in recent weeks, with the TTF front month still yet to decisively breach Eur40/MWh despite the support level having been tested, and confirmed, many times in April trade.

"It seems like Eur40/MWh [for TTF front-month] is the floor, and that the bearishness looks to be priced in at this level," a Germany-based gas trader said.

"Nothing has changed in my view [over the past few weeks]...if anything, [we will see] another attempt to break it and another failure," he continued. "Going forward, I think the prompt will be largely muted, and that the risk premium moves to the back end."

Since mid-March, Platts assessed the TTF front-month between Eur39.025-Eur50.45/MWh, with assessments below Eur40/MWh rebounding the next day, and peaking on the first day of summer amid a buying rally. The monthly average for month-ahead TTF last fell below the GCI in December 2020.

While the majority of long-term delivery contracts to Europe are indexed to virtual hubs or as a hybrid between hub and oil indexation, pure oil-linked supply still remains written into contracts for LNG offtake, African pipeline supply, and what remains of Russian pipeline supply to Europe amid geopolitical tensions.

If virtual-hub prices drop below the value of long-term contracts, buyers would typically show a preference for buying gas at the hub, rather than nominating on their agreement.

Leftovers

With price support seemingly so secure, what is left of available volume in Europe originally sourced on the global spot market is also having an influence on the current dynamic.

The Summer 2023 TTF contract currently in delivery also did not breach Eur40/MWh during its time as the front season, while its NBP counterpart only dropped below 100 p/th on a single day in March. These products averaged Eur44.75/MWh and 112.414 p/th in March, respectively, after having fallen significantly from historic highs in August.

This means that any available composite contract in summer delivery would have to be sold above these levels in order to maintain a profit, and, given that the majority of summer supply was sourced more expensively, would leave little scope for inexpensive short-term purchases.

More generally, the fundamental situation has changed in Europe, with the alleged sabotage of the Nord Stream supply systems from Russia, Moscow's banning the use of the Yamal transit, and force majeure declarations in Ukraine pertaining to Russian transit through the country, which persists despite the war.

For these reasons, a justifiable price floor could be established to separate pre-and-post crisis environments. Before March, neither the NBP nor TTF month-ahead contracts had been assessed below the support level since July 2021, as Yamal transit slowly began to recede.

In adaptation to the circumstances, Europe also turned to alternative power generating fuels to free-up gas for storage and consumption. This has also reinforced support above the threshold for coal-to-gas switching: the Platts Coal Switching Price Indicator.

With a fall below the CSPI likely to constitute a greater use of gas when gas is scarce, the Dutch 45%-50% efficiency CPSI range averaged Eur37.867-43.96/MWh since mid-March, with wholesale support falling within.

This has translated to the NBP, as Continental demand for UK gas has also lent support, with the UK being a key alternative to Russian supply during the crisis alongside oil-linked supply.