Cold Snap Drives Up Gas Demand
This Winter, as the mercury drops, households will fire up their heating systems, and it’s a rare sight to see thermostats turned down again until Spring. This sustained demand for gas following cold snaps, a phenomenon caused by a rapid fall in temperatures, triggers a noteworthy uptick in day-ahead (DA) prices, and echoes throughout the front-month and other futures gas contracts.
In this article, we examine the recent surge in gas prices as a result of this year’s delayed decline in temperatures, and provide insights and analysis on the various market factors.
October 2023: Record Breaking Gas Demand
As we approach Winter, the absence of Russian gas in the supply mix is once again poised to impact gas supplies. While there is an adequate supply of gas available, the challenge lies in the reliability of transportation infrastructure and limited storage capacity. As a result, when market volatility occurs, the potential for price fluctuations to be more erratic is increased.
This was the case in Mid-October, when the warmer weather was interrupted by a cold snap in daily temperatures to around 7°C, prompting households to increase their heating usage. Boilers which were not serviced ahead of time require more gas to reach the same level as heat as those which received maintenance, consequently driving up demand further.
On Friday 6th of October, during the warmer than normal temperatures, NBP DA and front-month gas prices opened trading at 65p/th and 89.9p/th, respectively; by the morning of Monday 16th of October, at the tail-end of the cold snap, NBP DA gas prices had elevated to 138p/th, with NBP front-month at 136.7p/th.
In fact, on Monday 16th October, UK gas demand peaked at 135.175 million cubic metres, marking the highest demand since February this year and the largest for the month since 2021.
Why Does An Increase In DA Prices Affect Contracts Along The Curve?
Market sentiment plays an integral role in shaping the price evaluations across various contracts. Specifically, in the case of DA contracts, they often reflect the most immediate supply and demand conditions, which are sensitive to factors like weather forecasts, including cold snaps, unexpected disruptions, and geopolitical events.
When DA prices experience an upswing, this can create a perception of heightened volatility and uncertainty, prompting traders and investors to adjust their positions within the futures gas markets, which include front-month, Summer24, and Winter24 contracts.
Additionally, market participants often look at DA prices to get an indication of short-term trends, taking into account their own expectations and speculations on how they believe the markets will play out. If DA prices surge, it may lead traders to increase their bids on futures contracts as they anticipate the bullish trend to continue.
Macro Factors Affecting Gas Prices
The surge in gas consumption increases pressure on the natural gas supply in the broader market. This Winter, much like the previous one, Europe finds itself in a situation where, although it has significantly reduced its reliance on pipeline gas from Russia, it now relies on the limited global liquefied natural gas (LNG) markets to bridge the demand gap.
This upswing in demand comes at a time when the industry is already tackling multiple challenges, including ongoing maintenance activities in several Norwegian fields, the constraints on supply as a result of the Middle-East conflict, and the overarching global energy crisis ignited by the Ukraine-Russian war.
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