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Changeable spreads provide gas storage opportunities

11 May 2017 12:07 (+01:00 GMT)
Changeable spreads provide gas storage opportunities

London, 11 May (Argus) — Sharp changes in prompt spreads provided an opportunity for gas storage capacity holders to profit from cycling stocks last month.

NCG prompt prices opened enough of a discount to forward contracts to encourage some injections, even for firms with capacity that could be filled within 90 days, such as at the 7Fields site in Austria. These facilities could have hedged by buying the third-quarter 2017 contract and selling the first-quarter 2018 market.

There would only be an incentive to bring injections forward to the second quarter on days when prompt prices are at a discount to the third-quarter 2017 contract. NCG everyday prices were at a discount to the third-quarter market on 13 days in April.

Aggregate German, French and Dutch injections — excluding Norg, which is used to shape Groningen production — was 723 GWh/d over the 13 days. The stockbuild was 242 GWh/d on other days.

The higher injections — and softer prompt prices — were mostly on warmer days. Dutch heating degree days were on average 6.57 when everyday prices were below the third-quarter 2017 contract and 7.66 during the rest of the month.

Cold weather drives withdrawals

There was also incentive in the second half of April to withdraw some of the gas added to storage during the warm spell early in the month.

NCG everyday prices opened up a wide premium to the third-quarter 2017 contract in late April. This would be enough to cover variable costs, such as injection or withdrawal fees, at many sites.

Germany's Uniper Energy Storage, for example, has an injection fee of €0.42/MWh. NCG everyday prices at a premium to contracts delivering later in the summer that are wider than this could encourage capacity holders to withdraw, providing they already have gas in storage and sufficient time to replace any inventories.

Storage capacity with an injection profile of up to 150 days would still give plenty of time to replace any gas withdrawn in April.

NCG everyday prices were at a premium to the third-quarter 2017 market that was wider than €0.42/MWh on six days. And there were net withdrawals on four of these days, along with minimal injections on another. These were mostly the coolest days of the month.

May trades

Changes in other NCG storage spreads also offered an opportunity to profit from storage while remaining fully hedged, and without requiring any injections.

The NCG May market was as much €0.15/MWh below the third-quarter 2017 price in mid-April. This could have encouraged bringing forward injections by buying May gas and selling the third-quarter 2017 contract. But the May-third-quarter 2017 spread had reversed to a €0.15/MWh premium by the end of April, which would have offered an incentive to reverse that trade.

This could have allowed capacity holders to make €0.30/MWh — before taking into account the costs of trading — even without any physical injections.

There have been more opportunities for withdrawals in recent days, with NCG prompt prices at a wide premium to the third-quarter 2017 contract. But the weather is forecast to turn warmer and the NCG June market has held close to contracts delivering later in the summer.

Aggregate injections up

Aggregate northwest European injections increased last month, despite net withdrawals on some days and broadly similar weather to the past two years. The German, French and Dutch stockbuild — excluding Norg — was the highest for April since 2014, which was particularly warm.

Growing UK exports through the Interconnector because of Rough injections being unavailable and higher French LNG receipts helped bolster the stockbuild. Russian exports to Europe remained high, which was similar to last April.

Injections were broadly similar to a year earlier once adjusted to take account of slightly warmer weather in April 2017. But the weather-adjusted stockbuild was higher than in April 2015, when maintenance at Norway's Troll field left less spare supply for injections.

There were few opportunities to bring injections forward to the second quarter in 2015 as prompt prices held a premium to contracts delivering later in the summer. But NCG prompt prices regularly slipped to a discount to the third-quarter 2016 market in April-June 2016, which encouraged increased injections last year.

The stockbuild will need to expand further this summer compared with previous years to bring inventories back in line with a year earlier because of below-average stocks after strong withdrawals during the 2016-17 winter.

3891933

German, French and Dutch stocks, excluding Norg TWh

Wide spreads drive swing to withdrawals in late April

Everyday prices dropped below near curve in 2016 €/MWh

NCG May-3Q17 spread reverses €/MWh

Cool weather curbs stockbuild later in the month