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Market report July 2018

By Nick Mustard, Senior Energy Analyst, Corona Energy

UK Natural Gas prices declined at the front end of the curve in June, with front month July shedding 9% from the previous month, when the market was extremely bullish and had seen gains of 10% on that same July contract.

That reduction filtered through to a lesser extent into winter prices, with the Winter-18 contract trading down 3% across June, though not giving up as much of its earlier gains, where the month of May saw a punchy 8% rise across the whole winter season.

Prompt prices also eased during June, particularly in the back end of the month when the IUK interconnector went on its annual maintenance period, preventing exports from the UK to the continent.

That reduction is to be viewed in context against last summer – prompt prices only dropped to around 52p/th during the interconnector closure, in comparison with a low of 25p/th touched last year, albeit very briefly.

Both prompt and forward prices for Winter-18 in particular remain well supported due to firmer fundamentals than seen in recent years, the key drivers being European storage inventories and a bullish oil market, with Asian LNG prices also retaining their premium over European hubs. European coal – a competing fuel for power generation – has also been strong.

European gas storage inventories ended winter at around 19% full, the lowest level in at least 9 years. This was a direct result of the bitter cold spell across the UK & Europe at the end of Feb/beginning of March which saw a strong draw down on facilities already at depleted late winter levels. This has set the tone for summer, with increased injection demand required to refill facilities.

Injections have returned inventories to similar levels for the time of year to those seen in recent years, but has taken place against a background of rising oil prices as oil production cuts have begun to bite, compounded by the impact of geopolitical tensions. The USA’s withdrawal from the Iran nuclear deal and the anticipated impact of re-imposition of economic sanctions looking set to constrain production from that country. In May Brent oil briefly broke $80/barrel for the first time since 2014, and since has continued to trade in the $70 – $80 range. This contrasts with last summer where the main global benchmark averaged just $51/barrel.

LNG deliveries to the UK picked up after winter but have slowed of late, as Asian spot LNG prices extended their premium over European hubs to around 10p/th, comparable to what was seen last winter.

UK and Europe have been in the grip of an extended warm spell this summer, though UK demand has remained strong, helped by strong exports across the IUK to the continent.

These factors have driven the current forward curve for the next 12 months above subsequent years, with Winter-18 and Summer-19 contracts up a whopping 18% and 24% respectively from the end of the winter-17 season.

Gillian Thompson