(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.
British contracts for November delivery have been trading about 2% above their Dutch equivalents, the most liquid gas futures in Europe, over the past few days. That’s higher 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, Europe’s gas benchmark, traded 0.4% lower at €38.77 a megawatt-hour at 8:44 a.m. in Amsterdam on Wednesday. The UK equivalent contract was down 0.4% at 96.79 pence a therm, or about €39.30 a megawatt-hour.
Both contracts erased last week’s gains as energy supplies from the Middle East continue uninterrupted so far, yet traders remain on high alert for further developments.
Unlike key countries in the European Union, Britain lacks winter storage capacities. Its facilities are able to hold fewer than 8 days of peak demand during freezing weather compared to Germany at 89 days. So the country 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 driven by the need to attract more LNG after arrivals to the country dropped earlier this year, according to Elizabeth Kunle, 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 January to September compared to 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, and domestic gas usage by the power sector also slumped.
Still, the current premium could be short-lived — barring weather changes — according to Kunle. The UK may remain a net gas exporter in November given “quite robust” domestic supply, she said.
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