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2 Dec 22 2010 @ 10:21am by Matt Smith in Natural Gas, risk management, UK natural gas

Now Panic And Freak Out

Earlier in the year, I wrote a post about the sideways movement in US natural gas and crude oil prices, called ‘Keep Calm And Carry On’. Well, now seems an opportune time to flip the coin, as we are seeing UK natural gas prices panic and freak out.

NBP (National Balancing Point  – aka UK natural gas) prompt month prices have rallied as much as 36% since early November, as a cold start to winter has caught the market off-guard and depleted storage levels at a rapid clip. After last year’s coldest winter in over thirty years, there was the expectation that the UK was owed a mild winter; but this seems not to be. The entire UK has spent much of December under a blanket of snow (a rare occasion in itself), while temperatures are registering record lows. Given this backdrop, it is not wholly unsurprising that prices are both panicking and freaking out to reach twenty-two month highs, as gas demand reaches record levels.

But let’s take a deep breath and count to ten, then look at the bearish side of the equation.  

UK Storage levels, 2006 - 2010

And relax. Yes – demand is high, yes – storage is being depleted. But the bigger picture for the UK is that supply is strong. LNG deliveries continue apace (now making up approx. 17% of supply), and this theme should continue as Qatar – the world’s largest exporter of LNG – is bringing further supply to market (and could keep doing so). Norway is also providing reliable imports (approx. 20% of supply). And finally, the cherry on top: US natural gas prices. As the below chart illustrates, there is no way the US is going to attract LNG cargoes at $4/MMbtu, when current pricing in the UK is well over double that. 

UK nat gas prompt month (blue) vs US (yellow), $/MMbtu: Aug 09 - present

Considering UK natural gas prices are historically highly volatile, it should come as no surprise that the market is freaking out, as bitterly cold conditions and high demand are spreading panic early in this winter season. But given the overall market fundamentals, there seems little reason to jump into the market at such great heights – after all, prices have been unable to hold above 60p/th despite all the bullish hubris. Yet if in doubt, the market should always reflect back to the British idiom of keeping a stiff upper lip, and remember to always keep calm and carry on.   

2 Comments on this post:

  1. J says:

    Nice to see you used the Olly Moss poster!

  2. Matt Smith says:

    Thank you for the heads up, Two Soups!

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