UK natural gas futures prices have surpassed the European benchmark contracts, indicating that traders are beginning to prepare for a rise in demand. In recent days, the UK natural gas contract for November delivery is about 2% higher than the most liquid Dutch natural gas futures contract in Europe, a greater margin than the same period last year.

During the summer, UK natural gas futures prices are typically lower than Dutch natural gas futures, but they may switch to being higher than this European benchmark in the winter to attract additional supplies. This year, escalating tensions in the Middle East and concerns about the risks to liquefied natural gas (LNG) supply from major exporter Qatar have intensified this trend.

As of press time, the European natural gas benchmark Dutch front-month futures price fell by 0.4% to €38.77 per megawatt-hour (MWh). The equivalent UK contract fell by 0.4% to 96.79 pence/therm, or approximately €39.30/MWh.

Since energy supplies from the Middle East have not been interrupted so far, both futures contracts have erased last week's gains, but traders remain highly vigilant about further developments.

Unlike major EU countries, the UK lacks winter storage capacity. Compared to Germany's 89 days, UK facilities can only meet less than 8 days of demand at the peak of cold weather. Therefore, the country often exports spare natural gas to the EU in the summer and imports fuel in the winter through two pipelines connecting the Netherlands and Belgium.

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Nick Campbell, Managing Director of Inspired Plc, said, "A prolonged cold spell could quickly deplete the UK's natural gas storage facilities, hence the need for a premium pricing compared to the European continent."

Elizabeth Kunle, a natural gas market analyst at S&P Global, said another driver of the UK natural gas futures premium is the need to attract more LNG after a decline in UK LNG imports earlier this year. She said that ships carrying super-cooled fuel "prefer terminals in North West Europe and Italy rather than the UK."

According to ship tracking data compiled by Bloomberg, LNG shipments to the UK from January to September were more than halved compared to levels in 2023. The EU has increased its LNG import capacity, reducing the demand for supplies from the UK, while domestic natural gas usage in the UK's power industry has also declined significantly.

However, according to Kunle, unless there is a change in the weather, the current premium may be short-lived. She said that given the "quite strong" domestic supply, the UK may still be a net exporter of natural gas in November.