Talk about the UK natgas/liquefied natural gas (LNG) glut appears to be intensifying.
The latest to warn over the situation is Merrill Lynch, whose analysts on Monday described the market as “plagued by weakness” as they turned “more negative on UK nat gas prices in 2010”.
The culprit once again is surplus LNG heading in the UK’s direction. As the Merrill analysts explained:
We see UK natural gas inventories end the winter season at the highest level ever recorded. Ample supply from LNG imports combined with protracted demand weakness will likely keep UK nat gas prices very low this winter. Moreover, we remain concerned on the demand outlook and doubt the market can absorb the growth in supply, stemming largely from LNG. As a result, we are downgrading our forecasts for 2010 to 30 pence/therm from 45 pence/therm. We expect UK natural gas prices to remain very low this winter as the recession continues to take its toll on gas demand at a time of record high LNG imports.
And regarding that LNG surge in particular:
LNG flows are largely to blame for the current glut of natural gas in the UK market. So far this year, LNG flows into the UK gas system have averaged 0.9 bcf/d, compared to a meager 0.05 bcf/d over the same period last year. As such, LNG imports now make up 10% of the supply mix. This far exceeds the amount of gas arriving in Britain from Holland via the BBL pipeline. Qatar, which barely exported anything to the UK in the past, is now Britain’s second largest gas supplier, after Norway. More worryingly, the impending surge in global LNG supply could partially end up in the UK shores next year, aggravating the surplus.
Compounding matters, of course, is the UK”s limited natgas storage capacity and how full it is getting for the time of year — as can be seen in the following chart from Merrill Lynch:
Meanwhile, the following chart reflects to what degree LNG imports have soared as a share of the UK’s total incoming natural gas:
Of course, there’s only so long the UK market can keep picking up the slack, which leads the Merrill analysts to wonder who will take up the additional volumes in the end. This is especially so given Russia, Australia, Norway and Qatar are all set to increase flows in the next few months.
Annoyingly for the market, however, the two regions most likely to see a pickup in demand — China and India — still lack the import capacity to handle the extra flows. Meaning any surplus volumes will inevitably have to flow back into the Atlantic Basin — a fact that leaves the Merrill analysts bearish Henry Hub and UK forward prices well into 2010.
As they noted:
The extreme weakness in UK natural gas prices is not just confined to prompt prices. Prices for the summer of 2010 just fell below 30 pence/therm, falling below the equivalent US Henry Hub contract for the first time. Moreover, the spread between winter and summer UK natural gas prices has compressed significantly. In our view, bearish fundamentals will continue to depress the Q1 versus summer 2010 differential, potentially driving winter gas prices below the summer strip. We expect the contango on the NBP forward curve to stay very wide, signaling the weakness in the spot market. Meanwhile, we see the back-end of the UK natural gas curve supported by the strong link to crude oil, via European oil-indexed contract prices. As a result, we continue to like strategies that benefit from rolling down the curve to benefit from the contango.