UK natural gas prices continue to disconnect from oil | FT Alphaville

UK natural gas prices continue to disconnect from oil

UK natural gas prices have traditionally followed oil prices due to the practice of linking long-term contracts to crude in Europe.

Analysts in the market, however, are getting excited because of a nascent disconnect in that relationship, one which could be about to make their lives a little more interesting.

The following chart from Reuters, which comes to us courtesy of Nick Campbell, an energy market consultant at Inenco:

The chart shows a clear disconnection between oil prices and UK gas prices from the fourth quarter of 2008 and onward.

As Campbell explained:

Oil was the major force on the bull run seen on the winter gas price, as the market topped $147/Bbl during the Summer ’08. The gas price did subsequently fall as global risk appetite weakened and stop losses began to get hit.

As oil began to firm as we progressed through 2009, the disconnect became apparent in the Summer of 2009 as both South Hook and Dragon LNG terminals became operational. This allowed the UK to increase the flexibility of its supply portfolio and allowed it to become less reliant on European long term index linked contract gas.

This disconnect was further exacerbated by the lack of appetite from the US for LNG, which the Qatari project saw as one of its main stays. As a result the UK terminals became a prime target to pick up the slack available in the market and help ease concerns surrounding Norwegian outages, cold snaps and technical issues, which has been reflected in the disconnect.

Which is essentially saying that a growing stock of gas making its way into the UK system via liquefied natural gas is breaking the region’s dependence on volumes from Europe.

Long live cheap gas prices.

Related links:
Why keep drilling for natural gas? – FT Energy Source
US natgas spikes 7% – FT Alphaville
More UK natgas glut talk –
FT Alphaville