Winter gas up four-fold during summer, spot in three-fold return

Buyers of British NBP gas before this summer would have made a four-fold profit on the front-winter contract and potentially a near three-fold return on a Summer 2021 purchase sold on a spot basis, a trading analysis of S&P Global Platts pricing data found.

The potential huge returns opened up due to an unprecedented rally in gas futures in the summer season, as a rush to replenish depleted storage stocks, multi-year low wind power generation, heavy Norwegian production maintenance and lower Russian supply to Europe than previous years took hold.

A feature of summer-season trade was the mutually-supportive nature of the forward curve and spot market, although the analysis found the former was implicated to a greater extent than the latter as winter purchases to avoid supply risk in winter eventually won out.

Against a backdrop of not only lower Russian supply through Ukraine and Poland from winter and the uncertainty over the introduction of Nord Stream 2, but also competition with Asian for compensatory LNG cargoes to fill the gap, the Winter 2021 NBP contract was valued at just 55 pence/therm before it became the front season on March 31.

By the time of its expiry as the NBP season-ahead contract, it was at 236.30 p/th for a 330% increase during summer trade after rising 106.05 p/th in September alone including 54.25 p/th in the last five trading days of the month.

While that was potentially lucrative for sellers and non-physical traders, for buyers it would have been disastrous for utilities if physical consumption positions had not been hedged before the summer began, and for those who left it too late to escape the September surge. The fact this surge happened at all may indicate that this was just the case.

Indeed, several small UK power companies have ceased trading recently. Such operations are often founded on the assumption that purchases can be made on the spot market as risk premium dissipates. Smaller suppliers also simply do not have the capital reserves to hedge positions too far in advance.

While even an early decision to purchase Winter 2021 could have been made inexpensively, the contract was not valued below the 55 p/th opening price once during summer trade. It averaged 98.407 p/th in that timeframe, and was consistently valued above that level from July 28 onwards.

This average price could be considered a concrete floor for spot out-turn prices, although as things stand there is little realistic chance that prices will fall to such an extent given forward indications.

Not looking back

There may be regret from traders even as far as the summer contract is concerned, if it was also unhedged as summer began or non-physical traders missed the move higher.

The analysis showed that, at best, the Summer 2021 contract could have been purchased at 30.85 p/th during trade in the previous winter. It expired as the front season at 46.825 p/th, and averaged 38.607 p/th during its tenure.

Such was the surge on spot prices, no day-ahead NBP product during Summer 2021 was valued below the expiry price. If a summer purchase was sold exclusively on the spot market, it would have been sold at 90.45 p/th on average over the six-month period.

Unsurprisingly, sellers balancing market length at the last possible moment would have yielded a greater return than any forward strategy, the analysis found.

Conversely for buyers, summer delivery would have been best purchased as far in advance as possible, although those purchasing month-ahead could have left it to the last moment for June delivery.

There was also a similar lull in spot prices during early July, although that proved to be a momentary respite, with day-ahead NBP products consistently trading above average forward and closing prices for front-quarter summer products for the remainder of the season.

That could have been a missed window of opportunity to purchase before prices rocketed upwards, without ever really looking back.

Looking forward

Buyers may have hoped that some level of exhaustion may have crept in for injection and winter-hedging purchases, and for the heat to have finally been taken out of the market.

That has been the case to some extent, given that winter-delivery NBP spot prices have averaged 217.475 p/th October to date, although the Oct. 14 Platts Market on Close assessment process for NBP day-ahead gas was the second above winter expiry at 237 p/th.

A price spike on Oct. 5, which occurred throughout the curve, lifted the spot price to a new record Platts assessment of 278 p/th. That could have been caused in part by stop-loss purchases balancing losing short positions, which were originally predicated on the assumption winter purchases had concluded.

If any part of peak-heating season has not been prepared for, there could yet be more stop-loss purchases made in such a manner.

If fundamentals do ultimately loosen in the weeks ahead, the gas market was nevertheless expected to remain in a high-price environment for some time, which was reflected in future seasonal products.

Summer 2022 and Winter 2022 NBP have both averaged above the previous front-winter record October to date at 109.258 p/th and 111.983 p/th, respectively, and also now represent potential price floor for winter-delivery spot outturn.

If they remain tight, it will once again be those holding the market's length that stand to benefit the most, but only if this length was purchased well in advance.