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Our market view - week 3

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Cold weather drives gas prices higher


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NATURAL GAS

Cold weather leads to a sharp rise in UK gas demand and a jump in prices. Spot prices have been quite volatile with prices swinging based on latest meteorological data. Every revision to the forecast has led to a new assessment over whether storage stocks will be sufficient to keep the UK supplied to the summer. The lack of LNG vessels scheduled to arrive in the UK is supporting prices. Due to last February’s cold snap and a general expectation that the same month will also be this year’s coldest, the risk premium on February remains.

Overall gas demand remains weak, to a large extent due to power sector losses. UK gas demand dropped 9.4% in 2012 after a drop of 15% in 2011.

Gas use in the power sector dropped by 37% in 2012 (Jan-Oct) compared to the year before. Coal burn increased by 41% in the same period. Rising gas prices erode the profits of gas-fired CCGT use – allowing coal burn to soar in line with falling fuel and emissions allowance costs. In addition, growing renewable capacity has increased the variability of the energy mix due to the intermittent nature of wind generation.


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UK gas demand by sector and quarter, average GWh (DECC data)



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Updated