Early 2017's peak British gas prices less likely this winter season

LONDON (Reuters) — British wholesale gas prices this coming winter are seen unlikely to reach the peaks hit in January due to more expected liquefied natural gas supply and a weaker coal market but a lot depends on how far temperatures plunge, analysts said.

In January, winter gas prices rose to around 52 pence per therm, levels not seen since 2015 due to a number of factors.

An outage at Britain largest gas storage site Rough reduced levels of gas inventories significantly; coal prices were high and nuclear outages in France raised gas-for-power demand as Britain was exporting more electricity to its neighbor.

UK winter 2018 prices are trading at around 46 pence per therm but are unlikely to reach the winter 2017 contract's peak in January unless there is a very cold winter.

"There is less upside than last winter. A lot depends on the weather but two things are different - coal prices are lower and the amount of LNG (liquefied natural gas) available," Massimo Di Odoardo, VP of European Gas Research at Wood Mackenzie, said.

Part of what helped to sustain higher prices last winter is that coal prices were at times above $90/t but they have retreated now to around $60/t.

When coal is expensive, its main substitute natural gas becomes more competitive for power plants to burn for electricity. However, then demand for gas increases, thus raising wholesale prices.

Deliveries of LNG were also quite sparse last winter.

"We expect more LNG coming between now and the winter, possibly double the amount of last winter. That would limit the UK gas spikes seen last winter," Di Odoardo said.

Analysts expect around 20 MMt of new LNG supply to come online this year, some of which could come to Europe.

RELATIVELY SUBDUED

Last month, the outage at Rough was prolonged, with gas injection not possible until the end of April next year. There are also concerns in the market on whether it will be operational again.

Seasonal gas storage provides security and flexibility of supply. At times of low demand and therefore low gas prices in the summer, gas is injected into storage to be kept for when demand rises in the winter.

Although European gas storage levels are relatively low, supply routes are strong with a lot of gas available from Norway and Russia, said Christopher Haines, head of oil & gas at BMI Research.

"There is more than enough flexibility in LNG to cover any outage issues at Rough. All this should keep gas prices pretty subdued for much of 2017," he added.

BMI Research sees average UK gas prices at 44 pence/therm this year, up from a previous estimate of 38 pence.

However, the impact of the Rough outage might not get priced in by the market until the start of the winter gas season in October, said Oliver Sanderson, gas analyst at Thomson Reuters.

"There are also more risks besides Rough," he said, such as lower Dutch gas production.

This week, the Dutch government confirmed a plan to cut production at the Groningen gas field by 10% from Oct. 1 to 21.6 Bcm for the 2017–2018 gas year due to an increase in seismic activity in the area.

Groningen production would typically increase during the winter months and fall in the summer to meet demand in the heating sector.

"This January's (price) could be just an indication of where winter prices could go this year and early next if it is a lot colder than usual," Sanderson added.

Reporting by Nina Chestney; Editing by David Evans

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