Price Risk Report

31 March 2015

UK energy prices fell during March with gas down 3.4% to 1.65p/kWh and electricity prices down 1.3% to 4.54p/kWh. Oil prices were down 8% at $55/barrel, coal prices were down 2% at $61/tonne and carbon permits were down 2% to €6.91/tonne.

Beond Price Risk Report 31 March 2015
UK energy prices fell during March with a LNG supply glut forming in Asia and lower oil prices, but bounced off lower levels following gas storage reductions and concerns over Dutch gas supply.

LNG supply glut developing in Asia

Qatar liquified natural gas is heading back towards UK after being diverted to Asia over the last few winters, as Asian prices fall below UK prices. Asian LNG prices hit a low of $6.70/mmBtu this month due to excess supplies, down from a high of $20.50 in the February 2010 winter. The excess supply includes 6.9 million tonnes/year from a new Exxon Mobil well in Papua New Guinea and 7.4 million tonnes/year from the new Curtis project in Queensland. Over the next three years, another 58 million tonnes/year are expected from Australia, 49 million from new US export facilities and 41 million from Russia. This is in the context of current Asian demand of 180 million tonnes/year which is expected to increase 50 million/year within the next three years.

Oil price declines

Oil prices declined amidst continuing high uncertainty and price volatility. Prices were undermined by an over-supply of oil compared to demand, but this extra supply could easily be soaked up by a couple of years. economic growth in emerging economies. Further oil supply could follow a nuclear agreement today, between Iran and US resulting in about another 1 million barrels/day. Uncertainty and price volatility is driven by increasing fighting in OPEC supply countries such as Iraq, Libya, Syria and now a proxy battle between Iran and Saudi Arabia in Yemen.

Mixed global economic growth signals

Europe is anticipating growth following commencement of quantitative easing this month, lower exchange rates and oil prices. However US growth has slowed following an increase in exchange rates and fears of tighter monetary policy increasing interest rates resulting in asset price crash. China growth remains uncertain with fears of a property price collapse resulting in banking crisis.

Groningen gas supply risks

Closure of Groningen gas fields could produce a large gap in Europe’s gas supply. Last month’s earthquakes in Groningen resulted in the Dutch regulator reducing gas supply from Europe’s largest source from 40 billion cubic meters down to 33 billion. Fears are serious enough for an investigation due to report on 1st July which could even result in closing down production. Separate to this investigation, the Dutch highest court will make a ruling in April.

UK gas storage concerns

Centrica announced a reduction in capacity of Rough storage, UK’s largest, by 30% for six months to allow thorough testing and validation. The announcement pushed winter prices higher as Rough constitutes 70% of UK’s storage. In addition, Scottish & Southern Energy announced moth-balling about 30% of a smaller storage facility called Hornsea which is equivalent to 5% of UK storage.

Views

We believe that current energy prices provide good value, remaining below historical average prices. However, we expect considerable price volatility as the LNG supply situation in Asia-Pacific develops over the next two years which could lead to global excess supply. On the other hand we expect oil prices to recover over the next few years as global demand soaks up current excess supply and new shale oil supplies from US reaches its peak.

Recommendations

Energy buyers preferring fixed price contracts should renew and lock out prices for up to 2 years in order to take advantage of low energy prices. However, given our expectation of considerable price volatility with downside potential, buyers preferring to reduce risks may opt for a flexible purchase contract and lock away prices in layered tranches.

Energy buyers prepared to take on some budget risk for even lower prices may prefer spot-based hedging strategies. Especially with LNG supply glut forming and potential for Qatar LNG selling on the European spot markets.

When tendering your supply contracts, environmental charges need to be carefully negotiated to ensure that any fixed and pass-through components are fully understood and benchmarked correctly across different energy suppliers. offers. Also ask about subsidy pass-through costs from Electricity Market Reform in particular CFD costs which will start to pass through to bills in 2015.

Beond’s risk service and online risk tools include a broad range of innovative hedging strategies which can deliver considerable cost savings at no additional risk, by harnessing market uncertainty and price volatility. Also our tender service uses an online reverse auction which creates an intensely competitive environment to produce best prices and full transparency.

These views and recommendations are offered for your consideration and Beond makes every effort to ensure that the data and information in this report is accurate. However, due to the volatile and unpredictable nature of the energy markets, Beond cannot guarantee the accuracy of both the information and the recommendations provided. Beond does not accept any responsibility for errors or misstatements, or for any direct, indirect, consequential or other loss arising from any use of this information and/or further communication in relation to this information

Derek Myers, Managing Director, Beond, 07970 655249