The Winter 2016/17 gas contract expired last week, and as of April 1st, we entered the summer season. The price movement of the winter contracts was volatile with several large swings. Loking at the twelve months prior to the contract start date on October 1st, 2016, the UK gas W-16/17 contract had a wide hi- lo range of 16p/thm.
Winter gas expired on 29/09/16 at a price of 43.21p/thm, 27% above the contract low of 31.69p/Thm on 21/01/16. At this point, the broader commodity index was its weakest. Crude oil was trading around $30 while financial markets were at four-year lows. This bearish environment was the best opportunity to secure Winter 16/17 at the lowest price for such a contract since May 2005. Thereafter, the contract traded in a tight range until May when worries resurfaced after Centrica announced a cessation of operations at Rough storage for 42 days. Further upside came from an escalation of production issues and likely future restriction at Groningen in the Netherlands. Oil traded 80% above January lows with OPEC considering output freezes and US shale production forecast lower. Consequently, UK gas futures recorded the largest one-month rise of the year with winter contract rising around 21% in a short timeframe.
Markets took another leg up and reached a contract high of 47.70p/Thm on July 15, a full 50% rise from the low over a 122-day period, compounded by sterling recording extreme losses with markets shocked by the UK voting for Brexit. The next 40 days saw the extreme downside on the gas curve with Centrica once again surprising markets. Centrica Storage Limited said it expected twenty wells at its Rough natural gas storage site in Britain to return to service for withdrawal from November 1st. The number of wells available for withdrawals was a lot higher than earlier estimates of four, which in conjunction with a plethora of bearish fundamentals (revised weather forecast out until October, flurry of LNG cargoes, stronger GBP, and increased UK production) saw UK month-ahead gas fall 24% in August, the biggest drop since February 2009. We saw UK gas prices among the lowest in the world, trading lower than the US benchmark Henry Hub contracts for the first time in years.
Many market participants expected the above bearish fundamentals to push the market towards its January lows, but after falling 21% in 40 days, there was one last move and it was upwards. An announcement by French nuclear authorities warned that French nuclear production would be severely impacted over the demandintensive winter period. An issue uncovered during routine inspections identified a problem with the casing around the nuclear reactor, and thus checks were required on the remainder of its nuclear fleet. France has the largest nuclear fleet in the world and is responsible for producing around 75% of its electricity. The fallout from this issue saw contracts on both fuels rally across Europe. Gas-for-power demand was expected to increase dramatically while French power exports would halt with import requirements increasing tenfold. As a result, the winter contract rallied by 14.31% in 14 days to end the year on 43.21p/thm, 13% above the average price of 38.20p/Thm.
The current winter 2017 contract is trading at 47.24p/thm, just below the average of 48.46p/ Thm when analysing price movement since October 3rd, 2016. This is the fourth cheapest price for winter gas when comparing against the price of a winter contract on this date since 2005. Risk exists that the UK will go into winter with storage significantly below required levels thanks to Rough storage being unavailable for injections until July at the earliest; the next update from Centrica is sometime in July. Rough is an ageing asset that has outlived its shelf life by 25 years, and many question its future. Even if it does return to full operations in July, it would take around 170 days at full injection to replenish stocks. As per last year, this winter contract is set for increased volatility with Rough storage the main impactor. Markets now await Centrica. Any continuation of the injection ban will see further-dated contracts become instantly bullish. Between now and July would be a prudent time to review procurement strategies for any open position post-October 1st. Expect volatility.
Written By – Wayne Bryan