Crying over hot air | FT Alphaville

Crying over hot air

Last week was an interesting one for commodities reporting.

In short, the mainstream press discovered the UK natural gas market. And while it’s very nice that they should care so much about a usually under-reported market (bar end-user price-hikes), it did show up some curious operational misunderstandings and err, slightly alarmist reaction.

Namely the focus was on the National Grid’s issuing of two GBAs or ‘gas balancing alerts’, which some mistook for an outright “the UK has run out of gas” announcement, translating it further into the idea the nation’s inhabitants were imminently set to freeze to death and that the country was in for war-time style fuel rationing.

We’re talking about stories like this, and this, and this.

Not that we expect Sky’s Kay Burley to understand the in-depth workings of natural gas trading, but questions like “how much gas have we got left?” to the National Grid sort of reflected the problem.

Inenco, an energy consultancy, put out the following GBA explanation last week:

National Grid has issued one for today to warn big users they may have to cut consumption because of the cold weather. The GBA means that demand has risen to such a level that, given Britain’s supply and storage position, there is a risk that another supply shock could force a demand-side response, such as shutting down a gas fired power plant.

While that’s certainly not a healthy state of the market, it’s not the dire all-out shortage of natural gas and dawn of fuel rationing some were making it out to be.

As we at FT Alphaville have been reporting for a while, despite the colder than expected weather in the Northern hemisphere this winter, there has for the greatest period — if anything — been an oversupply of natural gas. This is particularly the case in the US. However, due to the increased use of liquefied natural gas this has largely translated into a global issue.

The UK has been among the chief markets affected by the US glut, with many US-bound cargoes diverted to UK shores instead.

Now despite that fact, it is also the case that the natural gas market is and always has been hugely volatile, with prices responding abruptly to any unexpected changes in demand. Sudden bouts of cold weather are a classic driver of short-term price spikes.

Furthermore, rationing of fuel to industrial clients when sudden shortages happen is to be expected, and is in keeping with contractual agreements. These sorts of agreements exist for that reason in fact, acting as an important mechanism in the balancing of natural gas supply/demand.

As Nick Campbell, an analyst at Inenco — an energy consultancy — told FT Alphaville on Monday:

I think on the whole the GBA was sucessful. End users turned down, gas fired generation switched to coal and supply ramped up from LNG.

Furthermore, as he also stated:

[it] would have been more of a problem last winter if we saw this extraordinary weather front then as we did not have the robust LNG supplies we do now.

As for the much reported factoid that the UK had only eight days worth of natural gas left — statistics originating from natgas experts the Conservatives — we’d say that was another misleading analysis of the situation.

Even if that was the case, it’s a figure totally in keeping with market expectations and a reflection of the UK’s natural gas set-up due to its position as natural gas producer. Furthermore, unlike continental Europe where storage was seen as the answer to a lack of domestic gas, the UK’s energy policy has over the last decade consciously been focused on prioritising investment in import terminals over storage.

The idea being the UK can always ship-in more natural gas when market dynamics call for it, rather than build up costly natgas stores. That’s not to say there isn’t an argument for building more storage terminals. Indeed as Inenco’s Ian Parrett wrote last year:

“The UK is lagging behind in terms of overall storage capacity, historically because of the UK’s own indigenous supply from the North Sea. “This is one part of the nation’s gas infrastructure that really needs looking at urgently. “Since 1990 the need for imports has increased significantly whilst storage has lagged behind, highlighting the growing discrepancy in energy security. “Worryingly, the recent economic downturn has seen several proposed new UK gas storage facilities become shelved.”

But looking at prices you’ll see the wider supply picture. Even after the GBA alerts were issued, within-day UK natgas prices (what can be considered prompt prices) never got higher than 62p per therm – a far cry from record highs of some £2 per therm struck in March, 2006.

Related links:
The weather outside is frightful…
– FT Alphaville
US natgas spikes 7%
– FT Alphaville
More UK natgas glut talk –
FT Alphaville