UK gas market is grappling with limited liquidity

01 September 2023

Gas Market

The risk premium that had been present in the UK gas market saw a decline during yesterday’s session, with the remaining months of the year loosing 9.89p on average. This decline not only erased the gains achieved in the previous three sessions but also resulted in the majority of contracts shifting into negative territory when considering a five-day average. The current market trajectory appears to be an effort to realign with fundamentals, effectively shedding the premium associated with Australian LNG industrial action. However, it’s still too early to definitively establish a clear downward trend in the market. The premium observed this month pales in comparison to the significant spike witnessed last August. During that period, the 2023 contracts reached 763.37p, a 661.55p premium to yesterday’s market.  With European stock levels at 93% fullness, and weak demand the market is in a comfortable position heading into winter.  

Power Market

GB baseload power prices fell during yesterday’s session, primarily driven by weakness in the gas market. Healthy near-term fundamentals facilitated the gradual erosion of risk premium from the front end of the curve. However, further-dated contracts showed some resistance to falling prices. The front-month contract Sep 23 concluded its final session at £81.75/MWh, representing a £7.75/MWh premium compared to its initial trading price at the start of the month. European carbon prices held firm yesterday, ended three consecutive sessions of losses. The EUA benchmark contract Dec 23 gained €0.03 to close at €86.03 a tonne. Auction volumes are expected to return to normal levels in September, which could create downward pressure on prices in the near future.  

Oil Market

During Thursday’s session, global oil markets extended their upward climb for the fourth consecutive day. The persistent momentum was bolstered by a decline in US oil stocks, attributed to robust exports, effectively offsetting the impact of sluggish macroeconomic indicators emerging from China. Notably, market sentiment is leaning towards the expectation that Saudi Arabia will prolong its oil production cut through October. This move has the potential to exert additional pressure on an already constrained system, consequently providing a foundation for additional risk premium. The Brent crude front month ended yesterday’s session at $86.86, up $1.00 on the day. The commodity has traded at an average of $80.65 a barrel year to date, compared to $98.92 in 2022.  

Markets this morning

This morning, the UK gas market is grappling with limited liquidity, a common occurrence on Fridays. The front month opened at 90.00p but swiftly retracted to last trade at 85.70p, in line with yesterday’s settlement. The remaining NBP contracts including the prompt contract are yet to see any trading activity. UK gas demand remains below seasonal norms, standing at 133MCM today. On the supply side, there has been an increase in LNG send-out, effectively offsetting the impact of maintenance on Norwegian gas volumes. The outlook for September includes three LNG cargoes to arrive at UK ports. The oil market has continued on from yesterday’s uptick, with the Brent crude front month last trading at $87.28 a barrel.  
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