U.K. Winter Gas Drops to Lowest Since 2011 as Storage Increases

Jun 26, 2014 12:10 pm ET

June 26 (Bloomberg) -- Natural gas for winter delivery in the U.K. declined to the lowest level in more than three years amid high inventories, tanker arrivals and a reduced risk of interruptions in Russian gas supplies via Ukraine.

The contract for the six months from October fell as much as 1.2 percent to the lowest level for a next-winter contract since January 2011, according to broker data compiled by Bloomberg. A strengthening pound also led utilities in mainland Europe to favor buying under long-term contracts rather than on hubs such as the U.K.’s National Balancing Point, said Nick Campbell, an analyst at Inspired Energy Plc in Kirkham, England.

Europe’s mildest winter in seven years depleted demand and meant less gas was needed to replenish storage sites, which are currently 25 percentage points above last year’s, according to Gas Infrastructure Europe, a lobby group in Brussels. The winter contract has fallen 4.9 percent since June 16, the day Russia cut deliveries to Ukraine, as onward flows to Europe remained near normal levels, reducing fears of possible interruptions like those seen in 2006 and 2009.

“The continued rapid build in inventories is one of the main factors” damping winter prices, Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said by e- mail. “It’s a reaction to the continued drop in spot gas and the fact that European gas inventories continue to build at a faster rate than anytime during the past five years.”

Winter gas declined as low as 57.8 pence a therm ($9.85 per million British thermal units) and traded at 58.1 pence a therm at 4:13 p.m. in London, broker data show. Same-day gas fell as much as 4.6 percent to 37.5 pence a therm as flows outpaced demand.

Storage Levels

European storage sites were 68 percent full yesterday, the highest for this time of year since 2011. Gas deliveries at the border with Ukraine, which meets about 15 percent of Europe’s gas needs via pipelines from Russia, are proceeding as normal, according to Slovakia’s pipeline operator Eustream.

The reduced Ukraine risk “along with storage fullness, plentiful LNG and the strong sterling has led to European utilities favoring long-term gas rather than buying from the U.K., thus seeing more sellers than buyers of the seasonal contract” Campbell said by e-mail today.

The pound approached the highest since October 2012 versus the euro as the Bank of England’s Financial Policy Committee introduced measures to cool the housing market. Sterling strengthened 0.3 percent to 79.98 pence per euro after climbing to 79.59 on June 16, the highest level since Oct. 1, 2012.

Prices also weakened as Brent crude oil traded near its lowest closing level in a week after Iraq said oil exports from the south of country will still increase amid the northern insurgency. Futures fell 0.5 percent to $113.38 a barrel on the ICE Futures Europe exchange.

Three tankers with liquefied natural gas are set to arrive at the Milford Haven port next week, according to data on the port’s website and ship-tracking data on Bloomberg.