Shaking off gloom depressing broader commodity markets, the U.K. benchmark for gas is nearing levels last seen in December when a key supply line exploded, and seven traders and analysts expect further gains. The move bucks the normal seasonal pattern of weaker prices in the summer when heating demand dwindles and contrasts with slumps in everything from oil to gold, sugar and zinc.
China’s energy demand is drawing in cargoes of liquefied natural gas that might otherwise have stayed in Europe, firming the gas market at a time when power generators are demanding the fuel to meet rules from governments to lower pollution from coal. Those trends along with carbon emission prices at a 10-year high is increasing the cost of electricity in Britain to Germany and France.
“You have a perfect storm,” said Wayne Bryan, a senior European energy and commodity analyst at Alfa Energy Ltd. “I don’t see any significant downside in the very near future.”
There’s no real end in sight for the rally, with a Bloomberg News survey of traders and analysts indicating that the U.K. front-month contract could reach levels last seen in December, when an explosion at an Austrian gas hub and outages at North Sea facilities crippled supplies and caused the biggest one-day price jump for the contract in eight years.
The market has picked up pace since the summer season started in April. The coldest winter since 2012 lifted demand for heating and drained storage tanks. Then, a heatwave across much of the northern hemisphere along with maintenance on pipelines and facilities feeding northwest Europe further tightened the market. Very little LNG was imported for consumption in the region, with most leaving for higher-demand markets in Asia and South America.
Gas held in European storage tanks fell below 20 percent full for the first time by the end of the winter, and even if levels have since increased, they are still near the lowest ever for the time of year with just five weeks to go before the official heating season starts in October. All that’s left traders anticipating the rally in gas prices may have further to run.
“We had quite low stock levels by the end of the winter, and on top of this growth in demand we have to fill our storages for unexpected demand,” Thierry Bros, a senior research fellow at the Oxford Institute for Energy Studies
, said by phone. “It’s rebounding in Europe in a big way.”
With prices consistently rising, sudden spikes are more likely on the back of any unplanned outages, said Simone Turri, head of origination for Central Europe and Italy at Switzerland-based trader MET International AG. And unless there is an oversupply or lower demand in the winter, the gas rally is far from over, he said.
European gas demand rose for a third year in 2017 and has remained elevated. Record-breaking temperatures in July and August in Europe forced French nuclear plants to shut as the temperature of cooling waters rose, and also halted coal generators in Germany, where barges delivering supplies had difficulty moving up unusually low rivers.
That boosted demand for gas, which companies have been encouraged to use as an alternative to more polluting coal. Another factor: the cost of European emissions permits has more than doubled this year, tilting the economics of power generation away from more-polluting coal units and toward cleaner generators burning gas.
Those factors leave Europe’s gas market in the most bullish mood in years. That’s causing pain for customers at the U.K.’s biggest energy supplier Centrica Plc
, who already are shouldering two price hikes this year.
By contrast, investors in generators from Electricite de France SA
to RWE AG
in Germany couldn’t be happier. Those utilities are just two of the companies benefiting from the surge in electricity prices, beating both peers and stock indexes in their home markets.
China’s thirst for energy of all kinds is driving the market, along with delays in giant LNG supply terminals just when they are most needed. While the nation’s trade spat with the U.S. is shaking commodities markets, demand for gas in its liquid form is holding up as the government in Beijing seeks to shift away from coal. China may become the world’s biggest LNG importer by 2021, overtaking Japan, according to JPMorgan Chase & Co.
“You’ve got China soaking up supply while Europe wants more,” said Lawson Steele, an analyst in London at Berenberg.