UK Gas Price Exceeds European Benchmark on Looming Winter Demand

Elena Mazneva
2-min read

(Bloomberg) -- UK natural gas futures have become more expensive than benchmark contracts in continental Europe, signaling traders are starting to prepare for a rise in demand.

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British contracts for November delivery have been trading 1%-2% above their Dutch equivalents — the most liquid gas futures in Europe — over the past few days. That’s more than at the same time last year.

Normally cheaper than the benchmark over the summer, UK futures can flip to a premium to Dutch gas during winter to attract extra supply. This year, the trend is being amplified by escalating tensions in the Middle East and worries about risks to liquefied natural gas supplies from key exporter Qatar.

Dutch front-month futures fluctuated on Wednesday and traded 1.3% lower at €38.43 a megawatt-hour by 3:41 p.m. in Amsterdam. The UK equivalent contract was down 1.5% at 95.71 pence a therm, or about €38.90 a megawatt-hour.

Both contracts have retreated from this year’s closing highs reached last week as energy supplies from the Middle East continue uninterrupted so far, though traders remain on alert for any developments.

“Despite the current downward correction, the market does not forget that some other risk factors still weigh on the European (and global) gas balance,” analysts at Engie SA’s EnergyScan said in a note.

Winter Premium

Unlike key countries in the European Union, Britain lacks winter storage capacities. Its facilities are able to hold fewer than eight days of peak demand during freezing weather, compared with 89 days in Germany. So the UK often exports spare gas to the EU in summer and imports the fuel during winter using two pipelines connecting it with the Netherlands and Belgium.

“A prolonged cold snap could quickly drain UK storage facilities, hence the need to price at a premium to the continent,” said Nick Campbell, a managing director at Inspired Plc.

The UK futures’ premium is also being driven by the need to attract more LNG after arrivals to the country dropped earlier this year, according to Elizabeth Kunle, a gas market analyst at S&P Global. Vessels with the super-chilled fuel have been “favoring northwest European and Italian terminals over UK,” she said.

LNG shipments to the UK more than halved in the January-to-September period compared with 2023 levels, according to ship-tracking data compiled by Bloomberg. The EU boosted its capacities to import LNG, which curbed demand for supplies from the UK, while domestic gas usage by the power sector slumped.

Still, the current premium could be short-lived — barring weather changes — according to Kunle. The UK may remain a net exporter of gas in November given “quite robust” domestic supply, she said.

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