Weekly outlook as the UK prepares for potential cold weather

Weekly outlook as the UK prepares for potential cold weather

This week has witnessed a number of unplanned outages in the Norwegian gas field of Aasta Hansteen, which supplies gas to the UK. Outages are periods of times where the extraction of gas is halted for reasons such as maintenance of the facility, technical repairs/improvements or health and safety concerns caused be incidents or adverse weather.

Some outages are pre-planned. In these circumstances, the loss of production is prepared and accounted for in readiness for the outage. Unplanned outages however can cause unrest in the markets as they are unpredictable. They typically cause a short fall for meeting gas demand in countries such as the UK, which in turn increases gas prices.

This gas shortage has been amplified due to the recent spell of cold weather across the UK, which increased the overall demand for gas as homes and businesses cranked up their thermostats.

Further compounding the issue was the fact that the UK’s gas system was already somewhat under strain due to lower incomings of LNG (Liquid Nitrogen Gas) tankers to UK Ports.

The country’s power generation is made up of approximately 45% gas fired power plants. As we are heavily reliant on the commodity for our nation’s power, we therefore feel the pinch in prices when outages lead to shortages that struggle to be recovered by renewables.

December is being forecast to be colder than normal, or at least the first half of the month is. A weather phenomenon known as a “stratospheric warming” is dragging atmospheric temperatures, at 30km altitude above Siberia up by around 40C and significantly (more than 30C) above the 30-year average value.

The direct effect on the Siberian jet stream is that cold air is pushed down towards the UK and Northern Europe. Current forecasts predict this will take place in around 10 days’ time.

Although current weather models cannot quite agree on the extent of this cold snap, the consensus seems to be that it should last between 7-10 days. This will undoubtedly have the effect of further skewing the December price shape, with the latter half of the month typically heavily discounted against the first half due to industrial shutdowns.

The main risk we now face in the UK is that an extreme weather event could potentially cause profound system strain, depleting European stocks originally earmarked for January and February; and as December weather forecasts start appearing in the widespread media, this could initiate some closing of December and winter positions, which would most likely push the whole forward curve up if it comes to fruition.