On 1st March 2018, a Siberian chill gripped the UK causing widespread disruption, in turn exposing the UK’s energy supply vulnerability during periods of peak winter-demand. As a result of numerous system outages, gas prices for within-day and next-day delivery soared to record highs.
In stark contrast, day-ahead gas prices one year on have fallen to 16-month lows, with temperatures hitting their highest levels since records began for a winter-day earlier this week. So what was the ‘Beast from the East’ and why have market prices differed so greatly in 2019?
What was the ‘Beast from the East’?
The ‘Beast from the East’ arrived in North-West Europe in late February, bringing with it widespread snowfall and plummeting temperatures up to 7-degrees below seasonal normal levels.
The unprecedented weather event was caused by Sudden Stratospheric Warming, which had been preceded by a marked period of EU blocking, a situation in which a persistent and station high pressure system blocks the climatological westerly flow at mid-latitudes. In effect, the usual East to West flow of the Jetstream was reversed, drawing in a Siberian blast to the UK.
What happened to the UK’s gas network?
Weather events throughout February and March 2018 exposed the underlying fragilities in the UK’s gas network. Primarily, the cold snap laid bare the increased dependence on gas imports to help balance the system, as the UK’s domestic gas production has been in decline over recent years. It also represented the first major test of the UK’s gas system following the closure of the long-range gas storage facility Rough. The storage facility had previously accounted for 70% of the UK’s gas storage capacity before being officially closed by Centrica in 2017, primarily being used to cover periods of peak winter demand. Overall, the UK’s end-winter gas supply was tight at the start of 2018, with mid-range stock levels and LNG arrivals much lower than the levels seen this year.
Supply problems came to a head on the 1st March, due to a combination of record-high demand and numerous supply outages. The cold snap had seen natural gas demand in the UK climb to 417mcm/d, the highest level for over 7-years. Despite this, forecast supply at 05:00 London open time was 48mcm short of balance, but quickly slipped further to 54mcm. A number of unplanned outages had disrupted gas supply across the UK. An outage at the South Hook LNG terminal halted the facilities 60mcm/d of outflows to the gas system, while BBL pipeline imports from the Netherlands were reduced due to compressor issues. All the while, outages affecting the GASSCO operated Kollsnes and Entry SEGAL pipeline in the North Sea limited flows through the Langeled pipeline.
National Grid issued a Gas Deficit Warning for the 1st March in response to the forecast imbalance in the market, the first time such a warning had been issued since its inception in 2012.
What was the impact on market prices?
Market prices soared as a result. Within-day natural gas prices reached their highest level ever at 350p/th, while gas contracts for next day delivery peaked at 230p/th. This filtered through into power prices, where day ahead baseload prices climbed to £97.00/MWh.
In the longer term, the ‘Beast from the East’ acted as a turning point for wholesale gas and electricity market prices in the UK, triggering a bullish run that culminated with seasonal contracts hitting 10-year highs in September 2018. Other fundamentals helped to support the price movement triggered by the cold snap, with escalating oil prices, a costlier wider fuels mix, poor LNG arrivals and widespread uncertainty surrounding Brexit all key drivers in the market.
What has changed this year?
In stark contrast to Winter-17, the equivalent period in 2018/19 has been characterised by falling energy market prices. Global oil prices have plummeted, the UK’s overall gas import picture has shifted and gas storage stock levels across Europe are in a much healthier position than last year. These factors amongst others have continually weighed on market sentiment since the turn of the New Year.
The key change in the UK’s gas supply has come from an increase in LNG arrivals in NW Europe, with arrivals reaching multi-year highs in Q418 and the start of 2019 as a result of falling Asian demand. The most apparent year-on-year change gas come from the weather, with temperatures in the UK currently over 22-degrees warmer than they were during the ‘Beast from the East’ last year. All in all, net gas demand has fallen well below seasonal norms at a time where gas supply is in a healthy position, a combination which has pulled market prices down.
If you have any specific questions regarding the information above, contact LASER's Energy Market Analyst Harry Perkins by emailing firstname.lastname@example.org.