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Our market view - week 20

Released - Last updated

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GAS

Increased LNG deliveries to the UK are helping to ease supply worries, and spot prices have dropped sharply. Still, the May contract expired at 64.4 p/th - a record high. This indicates uncertainty over how much LNG will arrive for the rest of the summer.

Six vessels arrived at the South Hook regas terminal during April, compared to five in total for the first three months this year. Another five vessels are due for the first half of May. Output from the terminal increased sharply at the start of April and has been above 40 mcm/d in May.

However, the LNG situation for the summer is unclear. The trend in recent years shows a steep decline in LNG vessels to Britain. During summer 2011 LNG imports to UK were 12.9 bcm but last year imports were down to 7.6 bcm as increased demand in higher priced regions of Asia and South America drew cargoes away from Europe. The amount of imports this year will depend on price signals to the market. Increased LNG demand outside Europe and reduced availability of global LNG supply are tightening the LNG market. There may be little flexible supply that can be diverted to the UK, but a cool Asian summer could free up some LNG cargoes.

Following the coldest March in more than 50 years, storage facilities in the UK were emptied by mid-April, and an additional 2.6 bcm of supply will be required to fill storage compared to 2012. There is also a potential for increased use of gas fired power generation following the recent closure of 3 GW of UK coal fired power stations, which will further tighten the market.

The market is finely balanced and small variations in supply or demand will have an impact on prices.

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UK South Hook LNG output (GWh) vs NBP day-ahead and front month (p/th) Source: ICIS Heren

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UK gas imports (mcm/month)  Source: DECC
Updated