UK gas supply does not remove winter question marks:
On only the second official day of winter 2006/07, traders sought to avoid punitive balancing charges by actually giving gas away in the UK. While the longer-term price outlook is currently positive for consumers, increasing confidence in UK gas supply security should not breed complacency ahead of a still uncertain winter. UK gas traders made 39 negative within-day trades on October 1, 2006, essentially paying counterparties to take gas off their hands. The wholesale gas contract for immediate delivery crashed in value as peak winter import volumes hit the UK network, creating a vast supply excess. Such was the balancing price slide that a number of market participants deemed it more economical to pay five pence per therm to a competitor to take their gas rather than face National Grid imbalance charges. The National Balancing Point (NBP) undoubtedly entered the winter 2006/07 trading period with concerns over supply security diminishing and, consequently, spot and forward wholesale prices have continued their recent downward trend. Spot price weakness should not, however, be mistaken for the beginning of the end of high gas prices in the UK. It is vital to understand the context in which contracts for immediate delivery crashed. Large test flows along the new Langeled pipeline and expanded Anglo-Belgian Interconnector arrived in the UK gas market at a time of low system demand. October 2, 2006 was, after all, an unseasonably mild Sunday. This, then, would appear to be a one-off; the freak outcome of testing new import infrastructure before peak winter demand has actually kicked in. A lack of demand for storage injections was also a contributing factor. Ultimately, Norwegian shippers will not continue to export gas to Britain regardless of price, most notably because gas arriving through Langeled can also be re-directed to Germany. The UK wholesale gas market can almost be viewed through two separate lenses at present: winter 2006/07; and April 2007 onwards. The current view on the forward curve is a positive one for the latter, with the wholesale price of gas delivery for calendar year 2007 having fallen 15% since April. Although in keeping with its competitors, Scottish and Southern Energy's (SSE) decision to delay raising its domestic energy tariffs until early in the New Year could potentially expose it to an upturn in customer losses. SSE's relatively low price position may hold little sway, should the forward curve continue to shed value and calls for residential price cuts grow inevitably louder. Many uncertainties remain, however, for the coming winter and, in particular, for industrial energy buyers who are more directly exposed to the NBP through flexible purchasing strategies. According to a recent Datamonitor survey of 1,500 major energy users (MEUs), 56% of their gas volume is being purchased flexibly. Over 80% of respondents were also "concerned" or "very concerned" by the current winter outlook. This figure will not be bolstered by the Met Office's latest forecast, which suggests that "later in the winter season, there is a signal for lower [than average] temperatures and an increase in the frequency of cold snaps." MEUs that have yet to secure their gas requirements in advance and face direct exposure to winter spot prices could quickly see the market move against them in the event of offshore glitches, lower-than-anticipated import volumes or a prolonged cold snap. In the not too distant past, the current day-ahead price of around 10 pence per therm was considered the norm by some market participants. It will be some time yet before the NBP returns to those halcyon days. 10.10.06