UK front-month gas becomes latest contract to hit highest ever price

The UK's NBP virtual trading hub for natural gas has become the latest European location to record a record-high contract price, with front-month delivery reaching its highest-ever S&P Global Platts Market on Close assessment Aug. 11.

In what could be a worrying sign for consumers ahead of winter, this latest record has remarkably occurred during a summer month for a summer month's delivery, beating the previous record set of 111.50 p/th on Dec. 2, 2005.

Following in the footsteps of Continental Europe, and indeed its own front-winter contract, the NBP month ahead closed at a record high of 116.10 pence/therm Aug. 11, having only ever surpassed 110 p/th once before.

Early trade Aug. 12 indicated that September delivery had retreated slightly from this level, but remained well clear of the previous record, changing hands at 115.05 p/th by 1000 GMT.

At this time, the Platts Intraday assessment for the NBP spot indicated fundamental support for the front month, with the day-ahead product assessed at the previous front-month record of 111.50 p/th Aug. 12.

An increasing amount of trade is occurring for future contracts above the 100 p/th level, with the front month now having spent a fortnight above this threshold. The more trade occurs for a forward product, the more likely its value will be replicated come spot delivery.

A fortnight either side of the previous record saw front-month closes at 71.50 p/th and 93.50 p/th, and had been restored below 70 p/th merely a month later.

The current price environment therefore has a much greater sense of permanence about it, and is continuing to look ever more menacing.

Barely clinging to its traditional premium, the NBP front-winter contract set a fresh record of 117.25 p/th Aug. 11, and has now been above 100 p/th for two weeks straight, the longest period in its history.

Despite these historical forward prices, actual spot-contract outturn during delivery has seldom lived up to forward valuations of risk.

In fact, prior to July of this year, only 21 Platts NBP day-ahead assessments had ever been higher than 100 p/th, with the most famous of these being the 'Beast from the East' record of 230 p/th March 1, 2018.

The Beast from the East was a weather event which led to record-high single day gas demand in the UK. Amid concurrent failures in domestic offshore production, the UK required extensive pipeline imports diverted away from the continent at a substantial premium, as well as draining an already limited LNG stock to balance. It saw the highest within-day NBP price ever traded at 535 p/th that day through the On-the-day Commodity Market (OCM).

However, the UK could be facing its most difficult winter in gas terms to date, with the current assessment of winter risk essentially equating to a spot average of 117.25 p/th across the entire 182 days of winter delivery.

While this is short of the all-time record for the spot, the notion remains that buyers are willing to accept this price to protect themselves from such price spikes, although some may question the wisdom, necessity and even the ethics of buying a winter block for half the price of a potential spike, which may itself only last one or two days.

Moreover, it may be scarcely believable that every September spot contract will contribute to an average of 116.10 p/th as the month delivers, and some will consider the price artificially inflated, or the physical risks exaggerated.

Fundamentally different

Comparing the fundamental picture between the two front-month records, there are some key differences which may help ascertain the true level of risk.

Most significantly of all, the 2005 record was set before the Langeled pipeline was commissioned, which is now overwhelmingly the main export route for Norwegian production to the UK.

At this time, the neighboring Dutch TTF hub was in its infancy, but did not respond to movements on the NBP as it does today, nor did it hold the ability to influence the NBP as it can now. Many would view the commissioning of Langeled as a factor in facilitating this strongest of hub correlations, given the flexibility it granted for Norwegian exports.

Back in winter 2005, the TTF front month lagged the NBP considerably when the UK market anticipated supply shortages. Today, a corresponding move on NBP or TTF is nearly always reflected on the other, barring a narrow margin of arbitrage.

Another difference in 2005 was the availability of imports via the IUK pipeline, which then had long-term contracts in place for ease of export from the European mainland to the UK. These expired in September 2018, and transit between the two has become much less common.

Storage was also a differentiating factor between the two environments. The UK's only long-term storage site, Rough, was closed in 2017, and has not been replaced with anything on its scale.

The NBP price environment has seldom been conducive to private investment in storage since Rough's closure. It is believed a seasonal spread of 20 p/th is required between summer and winter to make storage economically viable.

As things stand, when there is a glaring need for UK storage, the summer price has effectively caught up with winter. This not only stunts investment, but even current injections into what space the UK does have. This could prompt a government rethink into the issue.

So without significant storage space, and inconsistent pipeline imports from the continent which itself is facing a storage crunch amid lower Russian supply, the UK is left at the mercy of the global LNG market to attract necessary imports. To some extent, so is Continental Europe both now and for winter.

Both NBP and TTF for September delivery are currently at a discount to other global markets for LNG. Unless global LNG demand slows, there is unlikely to be a quick retreat from the current price level.