March/Summer 14 held above Day-ahead by natural gas demand uncertainty

Since 3 February, the Day-ahead contract has been closing consistently below the front month and Summer 14 at the TTF and NCG natural gas hubs. On Monday 17 February the NBP Day-ahead moved below the front month, but not the summer, and retained the discount through the subsequent sessions.
Demand in all three hubs has been very low for February, due to the extremely low amount of gas taken from the distribution system. So far this month, daily LDZ consumption at the NBP has averaged 218 million cubic metres per day (mcm/day), down 31mcm/day compared to the same month last year. In the Netherlands, daily household gas usage has been just under 86mcm/day, whereas in February 2013 the volume was 116mcm/day. This has been the key factor suppressing the Day-ahead contract at all three hubs with no significant outages to offer countersupport. Weather models currently indicate temperatures in northern Europe should remain above normal in the coming sessions, with gas demand for heating set to remain muted. Forecasts beyond one week out are generally not taken seriously and although a cold snap in March is not expected, it is still possible. One trader said the risk premium around colder temperatures next month is holding up March 14 at all three hubs, keeping it above the Day-ahead, but there is still room for it to fall. Summer 14 also has scope to drop, with its expiration price to be shaped by the injection requirement over that period. If a large amount of gas is withdrawn from storage before the first quarter ends, it will lift the front season as it comes closer to expiration. The expectation is this will not happen,

so the summer still has potential to drop as delivery approaches.I dont think we have seen the bottom yet, said one curve trader.

Storage
European storage sites are almost 20 percentage points fuller than at the same point in 2013. This has weighed heavily on front-month contracts since the start of the year, with the expectation that any demand leap or supply curtailment will be easily compensated by using stocks. In addition, the forecast of a low injection requirement over the summer months has pushed down the front season. But some think downward pressure from this may be coming to an end, with uncertainty over how full sites will be at the end of March. This is because of the increasing prevalence of short-term or annual storage capacity contracts, at the expense of long-term deals. Those with storage positions on these types of contracts will have no choice but to withdraw at some point, even if the spreads are not profitable. The market expectation is that March will be the last opportunity for this, but it is difficult to know how much will be used from reserves. This uncertainty could be keeping the NBP Summer 14 above the Day-ahead. In addition, large utilities and producers with significant storage positions may choose to withdraw before the winter ends and monetise stocks while they still can, rather than wait six months for the next winter. The uncertainty over this decision is also playing into relative resilience on March and Summer 14. Another factor may also lead to a spike on both the prompt and front season at the three hubs, even if the expected oversupply in March comes to fruition. It all depends on the accuracy of the markets prediction for the coming weeks. If traders have gone too short, the

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scramble to meet positions will ensure a rise on contracts, even with oversupply. One trader said: If we [European markets] are long, it doesnt mean there wont be a price spike, because it depends on how much expectation of length has been built into prices. If people have sold short more than the actual length that materialises, then prices could bounce up. By Ben Samuel

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Copyright 2014 Reed Business Information Ltd. ICIS is a member of the Reed Elsevier plc group. ICIS accepts no liability for commercial decisions based on the content of this report