Could NBP prompt mirror TRS volatility?

Developments at France’s smaller TRS gas hub this winter have provided some good parallels with the UK’s NBP, one of Europe’s most liquid markets.

The TRS was — in my view — Europe’s most exciting market, with prices responding well to the fundamental drivers of supply and demand. It also delivered some interesting examples of how European hub pricing might operate as global LNG supply increases, along with the potential for more volatility in prompt prices.

Cold weather, slow LNG receipts with a halt to loadings at Algeria’s Skikda plant, and French nuclear constraints resulted in a strong draw on southern French storage in the fourth quarter. TRS prompt prices for much of the second half of last year had been sufficiently higher than the Peg Nord to encourage flows through the north-south axis at full capacity.

The TRS would have been unable to sustain its fourth-quarter withdrawals for the second half of this winter. Importers had to turn to other sources of supply in the absence of additional capacity to increase deliveries on the north-south axis, with LNG providing the only other option.

TRS February prices rose above northeast Asian LNG prices in January to attract more cargoes, which subsequently arrived in February-March.

This dynamic shows the TRS functioning in a similar manner to the more mature NBP in March-April 2013, when a late cold snap in the UK and low gas stocks pushed up prompt prices to compete with northeast Asia and encourage sendout from the Isle of Grain LNG terminal. An Algerian cargo later replaced the inventories that were regasified during the NBP price spike.

LNG’s dual role

TRS front-month prices rising to compete with northeast Asia for cargoes this winter demonstrated the interesting role of LNG, and the prompt volatility it can provide at European hubs.

Supply can typically be divided very clearly into flexible or non-flexible, depending on whether it will respond to prices. For example, most Norwegian fields are non-flexible and produce at capacity all the time regardless of prices, except during maintenance. But state-controlled Statoil uses the flexible Troll and Oseberg fields to respond to prices.

LNG is one of the few sources of supply that straddle this divide. As the TRS demonstrated, cargoes can be sent anywhere in the world and LNG will respond to prices signals — it falls in the flexible category.

But LNG is also inflexible in two ways — it takes time for cargoes to arrive and once LNG is in tanks it is hard to get rid of, except through regasification.

TRS prompt prices were at their widest premium to the Peg Nord in January — before spot cargoes could arrive and with Skikda off line for much of the month.

But prompt prices tumbled in February once cargoes started arriving and sendout stepped up. TRS everyday prices were considerably lower in February and at a tighter premium to the Peg Nord than the front-month market had been in January. The TRS day-ahead market even settled below the Peg Nord on some days in late February.

The TRS-Peg Nord day-ahead basis market tightening was a possibility that we outlined in a 23 January comment:

“But if the TRS market area and Spain have enough supply to meet consumption without requiring further spot cargoes, prompt and near-curve prices could drop back towards northwest European hubs.”

Once LNG tankers are booked to deliver — and especially once the LNG is in tanks — it has to be regasified, or incur the extra expense of reloading and sending elsewhere. The LNG that has arrived at this point becomes non-flexible supply, even if the importer has outcompeted northeast Asia for the cargo and fully hedged it.

Demand in the TRS market area was lower than had been expected in February, because of milder weather and rising availability of French nuclear capacity as restrictions in place earlier in the winter began to ease.

The TRS no longer needed to compete for LNG, allowing the day-ahead and March markets to drop away from northeast Asian prices in February.

And as there was little scope to reduce sendout from LNG tanks because cargoes had been booked and were en route to the terminals, France’s flexibility to reduce supply in February came from lower deliveries from the Peg Nord. This resulted in TRS prompt prices being close to the Peg Nord for most of February.

Example for the NBP

There are similar possibilities for the NBP this summer, where prompt prices at delivery could be much lower than forward contracts had been — in the event of particular circumstances conspiring.

As set out in our NBP summer 2017 outlook, the Interconnector between the UK and Belgium is the only outlet this summer for UK supply in excess of consumption, as coal has already been fully displaced from the power generation mix.

In the event of strong LNG receipts combined with injection capacity at the Rough storage site remaining off line into the third quarter and mid-range storage being full, Interconnector flows could again reach full capacity.

Firms selling third-quarter 2017 cargoes at the NBP could do so with only limited pressure on near-curve prices, especially while it remains uncertain whether Rough will restart on 1 July, as scheduled, or how much LNG will arrive.

But once LNG has been delivered to South Hook it will have to be regasified to make way for arriving cargoes — it becomes non-flexible supply. If this leaves the UK with supply in excess of domestic consumption greater than the Interconnector’s capacity, NBP prompt prices may need to fall enough to encourage Norway to reduce production.

This presents the possibility — in certain circumstances — of the UK-Belgium everyday basis market coming close to September 2016, when Zeebrugge’s premium to the NBP briefly reached as wide as 8.15p/th.

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