WTI $53.57 +66c, Brent $56.42 +36c, Diff -$2.85 -30c, NG $2.67 -6c, UKNG 60p -8p
A small rally yesterday as whilst the dollar has recovered a bit, I think it is worth reading this ‘Expect the Weak Dollar Trend to Return’: Marcus Ashworth of Bloomberg who is the fount of all knowledge here. He, and, I expect that with President Elect Biden having announced this morning a bigger than expected $1.9tn stimulus will see a drain on the greenback.
A number of readers have asked, and commented on why I have started putting the UK natural gas price at the top of the blog this week. I have been meaning to add it for some time but the recent rally forced my hand. The irony is that having had a huge run the first day in the blog signalled the top, at least for the very short term…
Either way, UK NBP day-ahead prices which were as low as 8.6p on 28th May 2020 peaked at nearly 80p earlier this week, the highest since 2018, making an obvious and significant change for those focusing on gas production. Looking further down the curve, winter 2021 prices reached 53.7p, the highest close since Oct 2019 – reflecting a tightening gas market for next winter.
The continued cold, settled weather drove total UK gas offtake on Thursday last week to over 400mcm for the first time since 2018. By comparison, demand of 417mcm on 1 March 2018 during the “Beast from the East” prompted the first ever Gas Deficit Warning to be declared, driving NBP briefly to all-time highs.
Spot LNG prices in Asia hit a record (at the time) $21.45/mmbtu by last Friday 8 January amid a severe cold snap in Asia this was the highest level on record, equivalent to around 160p/therm based on current FX rates. Again this was up >9x from the exceptionally low level of $2.25/mmbtu as recently as April 2020.
Prompt gas prices in Spain also went over €60/MWh – an equivalent level – as the country was battered by Storm Filomena whilst on 12 January, the market went to even greater extremes, spiking up to over $30/mmbtu, and one LNG cargo for immediate delivery was even sold by Total to Trafigura for $39.30/mmbtu – reflecting an almost total lack of short term supply.
This unprecedented tightness in the LNG market is directly impacting the UK: I’m told total LNG cargoes delivered into the UK for January are likely to number only 3-4, versus 24 last January, an astonishing turnaround. Consequently the UK gas grid is currently highly dependent on pipeline flows and storage withdrawals and as at mid last week, 38% of gas supply came via pipeline from Norway, 16% from continental interconnectors and 13% from storage. UKCS production supplied only 22% and LNG only 11%.
So whilst a gas price recovery was predicted by a number of key players what has been driving such a strong and rapid resurgence? Firstly, fundamentals have inverted completely since the spring/summer of 2020 when they were very weak, for example extremely cold temperatures in Asia have been driving record power demand levels, in turn driving very strong gas demand and even has seen reported cases of coal fired power stations being recommissioned.
In a ‘you couldn’t make it up moment’, Government guidelines to keep windows open to reduce Covid risks in markets such as Japan are further strengthening heating demand literally blowing hot air into the atmosphere.
We in Europe have seen cold and settled weather compared to seasonal norms (and exceptionally cold winter conditions in some specific areas around Europe, e.g. Madrid where measurable amounts of snow has settled most unusually).
All this has led to withdrawals from UK inventories were near a 3-year high in the first week of January. Renewables and ‘trendy energy’ havent delivered quite as had been hoped for in some cases, indeed less windy weather has reduced wind power generation, accentuating high gas demand.
Global LNG production growth slowed sharply in 2020, increasing by less than 6m tonnes to 361.4m tonnes, after years of sharp increases and some large LNG projects have recently experienced unplanned outages, further reducing supply (e.g. Hammerfest in Norway, Prelude and Gorgon in Australia, Arzew in Algeria).
Short supply of LNG vessel capacity and congestion on the Panama Canal has reduced the availability of spot LNG cargoes, with the longer journey for US cargoes going to Asia soaking up capacity. Thus spot vessel rates have rapidly escalated, with BP recently paying $350,000 a day to charter an LNG tanker – the highest day rate in history for any commodity tanker (I understand LNG tanker spot rates are typically around $50,000/day).
Where should we expect prices to go in the short term? Weather forecasts are warning of more cold weather to come over the coming weeks – with even the outside chance of a repeat of the Beast from the East and we know what effect that has on spot prices.
I’m sure that investors are aware of all this but it is worth pointing out the recent price history as well as the potential for further strengthening of forward gas prices for this year and next as inventories fall faster than originally anticipated. As gas producing companies make trading updates in coming weeks it will be worthwhile finding out quite what benefit recent prices have meant to them and if they are taking any action to lock in prices this year and next.
The SFO has said that a former employee of a PFC subsidiary has admitted ‘additional charges’ under the UK Bribery Act and relate to three historic contract awards in the UAE in 2013 and 2014. PFC confirm that no charges have been brought against any Group company or other officers or employees. Indeed no current Board member of PFC is alleged to have been involved.
Petrofac have correctly bent over backwards to assist the SFO who have taken a very long time to announce these findings. If ever there was a time where former employees and particularly of subsidiaries are being tied back to the performance of the parent company being given more bang for their buck this is is.
England kicked on in the cricket, when rain stopped play in Sri Lanka they had overhauled the 135 and were 320-4, Captain Joe Root was on 168* with Lawrence making 73 on debut.
In the Prem the undisputed match of the weekend is the Red Devils visiting fortress Anfield on Sunday, no one would have had this as a top of the table match even a few weeks ago.
Elsewhere, on Saturday, Wolves host the Baggies, the Seagulls go to the Leeds, the New Kings Road derby sees Chelski going down to the Cottage, the claret and blue derby between the Hammers and Burnley and the Foxes host the Saints.
On Sunday the Blades entertain Spurs and the Noisy Neighbours host the Eagles whilst another Villa match is postponed….?
Its NFL playoffs this weekend with the Rams at the Packers, the Browns at the Chiefs, the Ravens at the Bills and the Buccaneers at the Saints. I think i got that right, apologies if not…