How Lockdown 2 has impacted the gas market
The last blog post in this series commented on an upward trajectory set beginning in August, with gas demand recovering relatively quickly from the lows of the first lockdown fuelling a recovery in prices. However, we signed off then summarising that much uncertainty remained – particularly around whether a second spike could send us back into lockdown and again eat into demand, which would again weigh on prices.
4 months later and we now know that we indeed have seen a second spike and another lockdown, which again, with the closure of many non-essential business and offices, has seen an effect on the wholesale gas market not too dissimilar to what we saw early in the year, only perhaps not quite as severe.
As before, this graph shows our 30-day rolling combination of UK LDZ, power and industrial gas demand – the three primary components of UK demand. Q1 we saw a mild end to the winter drop usage already below the previous year, before lockdowns and mild weather through Q2 saw significant demand destruction as much as 25% from the previous year. As restrictions relaxed and we saw cool weather through Q3, demand recovery was swift such that 2020 was then showing demand increases from 2019 from August to October as much as 20% year-on-year. However, the re-imposition of restrictions and an unseasonably mild start to winter has seen demand fall back below 2019 levels. The milder weather in particular has been a much more significant influence on demand and subsequently prices, as at the beginning of winter the expectation was that a ‘seasonal normal’ winter, even in a lockdown scenario, would see demand remain largely in-line with previous years, as lost commercial demand could be offset by a greater gas burn from domestic users. However, with the milder weather we have seen bringing a reduced need for space heating, this effect has been diminished – hence we see a strong reduction in year-on-year gas demand, although slightly less severe at 20%.
So now we can switch our focus to prices, which as expected have followed a similar pattern to demand. System Average Prices show the average price of gas traded over the On-the-day Commodity Market (OCM), so just the average price of gas traded on the day of delivery. As discussed previously low demand and strong supply weighed heavily on prices through the first half of the year, but again the recovery seen since has been strong, considering prices typically peak in winter through January and February, and prices rose quickly to a premium against 2019 of over 40%. Other bullish influences have also helped lift UK prices in recent weeks and months, such as supply disruptions in major exporting countries, optimism surrounding a vaccine and strong buying demand in Asia at the beginning of winter, and this increasing tightness at the front end of the curve lifted prices further out. However, this rally ended rather abruptly early in November, when again lockdown and milder weather began to weigh on prices, and we have also seen strong LNG supplies of which there was also some uncertainty ahead of winter. As a result, prices have stagnated over the past few weeks when we would typically have expected them to increase as we progress deeper into winter, so much so that we are now back at a price level much in-line with 2019, which again has weighed on prices further out, lowering the gas price on a standard contract.
Following on from the above we can now look at what the market (suppliers) have done to combat the impact of Covid 19. As highlighted above net demand has decreased. This coupled with a high risk sentiment across the market place has seen a significant number of suppliers take action such as
- Removing longer term pricing options from price books
- Issuing notices to advise they will not accept any new acquisitions from what they deem high risk sectors
- Increasing prices to consumers
- Refusing previously acceptable on credit customers
CNG however have during the pandemic issued our first ever 4 year/365 day price book and have not identified any sector that we would not accept. Our price position has been the best in market at times with the lockdown lowdown price books and we have not amended our credit worthiness terms with our current broker partnerships.
The above serves to highlight CNG’s commitments to customers & brokers alike, by offering excellent service at a fair price & understanding that whilst times are tough right now for the market, they will not last forever.
The current customer facing price market is very much aligned to the potential risk of Change of Tenancy & business failure, both of which are relative unknowns as there is little data around how utility suppliers navigate through a pandemic. As such, we expect this type of pricing to continue into the New Year. As with all industries we await the vaccine rollout and businesses reopening, until this time CNG will continue to endeavour to keep pricing fair & reflective of market conditions that we find ourselves in – as we always have.