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Highlights

Front month, winter gain in early trading before drop

Stop-losses likely activated across European portfolios: traders

No change in OPAL flows, French nuclear Wednesday

London — British wholesale natural gas prices eased on Wednesday morning, as the dust settled following Tuesday's market stampede that resulted in NBP front contracts making their largest gains in over 10 years.

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Wednesday's opening exchanges reflected yet higher prices before a gradual drop, with the NBP front month rising to 39.10 p/th before recording a 36.50 p/th valuation by 1000 GMT. The Winter 19 contract peaked at 52 p/th early on before sinking to 49.90 p/th in the same timeframe.

Tuesday's S&P Global Platts market-on-close assessments came to 38.20 p/th and 51.70 p/th for these contracts respectively, representing 6.475 p/th (20.41%) and 6.25 p/th (13.75%) day-on-day increases.

Market sources said that Tuesday's rally was triggered by various factors, most notably EDF's announcement that it would be conducting investigations into the technical standards of nuclear power plant components, potentially leading to shutdowns, the EU general court ruling overturning Gazprom's license to purchase additional capacity on the OPAL pipeline, and Dutch government proposals to reduce Groningen output to 11.8 Bcm for gas year 2019, with a view to phasing out production completely 2022 -- eight years ahead of schedule.

NUCLEAR REACTION

While these events undoubtedly influenced the thinking of traders, other sources have noted that such extensive gains may have been disproportionate, and instead attributed the market movement to stop-loss limits being hit, initiating a chain reaction of short participants rushing to buy as prices increased.

"We can see this morning that October is still volatile," a European gas trader said.

"It is normally the case to see gains extended, because people get the new credit overview. Some traders reached their stop-loss limit and they had to close their position. After that is done, traders revert to fundamentals."

Indeed, this reversion to fundamentals saw Platts' intra-day assessment of the NBP day-ahead contract fall 2 p/th from Tuesday's close to 27 p/th. This contract itself built up nearly 10% in the previous session, and has now begun to hold sway on the front month once again now buying impetus driven by other factors appears exhausted.

Despite being two contributory reasons why prices rose throughout Europe, French nuclear output and flows through the OPAL pipeline remained unmoved on Wednesday, with France's nuclear production persisting at 41 GW, while Griefswald gas receipts from the Nord Stream -- from which the OPAL transit receives gas -- set to be unchanged at 158 million cu m Wednesday, according to TSO nomination data.

While Gazprom is unable to purchase new capacity on OPAL, it is currently able to utilize its existing capacity, with Wednesday's status quo indicating day-ahead capacity is unlikely to a component of this. However, if the company has yet to purchase as much as it wanted to for next month, it will not now be able to build on existing allocated capacity and Europe could see a reduction in flows through this point.

HISTORY REPEATED?

Tuesday's market moves follow, and even exceed, two similar rallies earlier this year in April and July, when market sources indicated heavy usage of technical analysis to guide trading decisions as a key factor.

Stop-loss limits are often spliced with technical analysis, with participants recognizing their own tolerance for risk in terms of price swings and referencing it against larger variance limits indicated by technicals.

S&P Global Platts European Gas & LNG Summit | September 23-24, 2019 | Amsterdam

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"It is more about profit-and-loss overview, risk overview, and exposure overview. For example, if I am short 100 MW for October TTF and the market rises more than Eur2/MWh, this would represent a loss of Eur150,000 (100 x 24 x 31 x 2). If my maximum limit is Eur100,000, I would have to close this position," the European gas trader said.

The recurrence of upswing in an otherwise bearish season for prices could, on each occasion, have been exacerbated by buyers looking to hedge positions ahead of winter delivery.

This has become especially important for the UK, which is dependent on gas imports in winter months, and has had rising pipeline transportation costs to contend with in this respect.

NBP prices reached multi-year highs during mid-September last year as Europe faced stern competition from Asia for LNG imports, eventually overcoming the gulf between the Asian JKM netback for LNG and UK netback equivalent. Record LNG imports and regasification into the continent ensued.

As a consequence of Tuesday's gains, the NBP has now moved to an outright premium over the Platts JKM benchmark for October, in an apparent repeat of the precipitating events seen in September 2018. This could therefore see LNG help overcome any supply disruptions or demand spikes this winter, from wherever they may arise.

-- Neil Hunter, neil.hunter@spglobal.com

-- Edited by Alisdair Bowles, alisdair.bowles@spglobal.com