Price Risk Report - 1 April 2019

Last Month Summary

UK gas and electricity prices fell overall during March. Gas prices ended the month 13.9% lower at 1.52 p/kWh as temperature in both the UK and Continental Europe continue to trend upwards, reducing gas demand to be used in heating. Lower gas demand from Asia has also freed up supply for Europe, with eight LNG cargo deliveries expected to arrive into UK terminals over the next two weeks.

A decline in gas and coal prices has reduced the cost of burning fossil fuels for power generation, driving wholesale electricity prices down 8.7% to 4.91 p/kWh. However, it is worth monitoring Brexit talks, which is driving currency markets. Britain currently imports approximately 50% of its gas from other countries, meaning that the value of the Pound Sterling relative to the euro and U.S. dollar can make energy imports either cheaper or more expensive.

Brent crude oil prices rose 2.3% to $67.83/bbl, setting a new high for the year. The markets are being driven higher by OPEC-led production cuts and the U.S. sanctions against Iran and Venezuela, which have helped tighten the global supply and demand balance. These drivers have overshadowed concerns over a slowing global economy.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø If temperatures across Northwest Europe continue to climb during April, power demand for heating could be lower ahead of the summer months.

Ø Lower gas demand from Asia means LNG has been freed up to supply gas networks in the UK and Continental Europe. An increase in LNG deliveries into UK terminals will help drive energy prices lower.

Ø There are currently no major concerns over power generation outages in Northwest Europe to impact capacity next Winter.

  Ø Rising crude oil prices are likely to be a key driver for forward gas and power prices, driven primarily by OPEC production cuts.

Ø The end of production at EDF’s 2,000MW Cottam coal-fired power plant in September could add to Britain’s supply risk heading into Winter 2019/20.

Ø Despite recent volatility, the start of the Market Stability Reserve is expected to gradually drive the price of carbon allowances above €25/tCO2,.

 

Recommendations: Temperatures in recent weeks have generally hovered above seasonal normal levels, reducing supply risks. However, rising crude oil and carbon prices, as well as future gas and power outages, could still drive prices higher later in the summer.

As a result, energy users renewing later in 2019 or early 2020 should considering starting their renewal processes as soon as possible, to make sure all energy contracts are locked in before the end of June. It is possible that prices may decline in July, but the possibility of major gas or power outages driving up prices this close to Winter 2019/20 means the risks of waiting this long outweigh the potential benefits.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 April 2019
Source: Beond Analysis, Reuters

UK Triad demand lowest since 1995 as Triad dates confirmed for Winter 2018/19

National Grid has announced the confirmed Triad dates for Winter 2018/17, revealing that the combined demand during the UK’s triad periods this winter was at its lowest since 1995. The Triad dates have been confirmed as 22 November 2018 (45.2GW), 10 December 2018 (45.0GW) and 23 January 2019 (46.9GW)

Combined demand over the three periods in winter 2018-19 was 137.15GW, down from 142.8GW last year and the lowest since the winter of 1994-95. Energy efficiency and the decline of heavy industry have steadily eroded demand over the past 25 years.

Oil sets new highs for 2019, amid ongoing OPEC supply cuts

Brent crude oil prices rose 2.3% to $67.83/bbl, driven higher by OPEC-led production cuts and U.S. sanctions against Iran and Venezuela, which have helped tighten the global supply and demand balance. These drivers have overshadowed concerns over a slowing global economy.

Q1-2019 has been the best performing quarter since the Q2-2009 with both gaining about 40%. The strong gains last quarter have prompted U.S. President Trump to repeatedly call for OPEC to boost production to lower prices.

Theresa May considers fourth vote on Brexit deal as uncertainty deepens

UK MPs voted against all of the varied options on how the UK might leave the EU, even after Theresa May pledged to step down as prime minister in an effort to bring Conservative Eurosceptics behind her deal. Prominent Brexiter Boris Johnson was quoted saying that Prime Minister May’s existing deal was “dead” added to the uncertainty. Theresa May is considering putting the proposals back to parliament for a fourth vote after the terms of departure were rejected three times.

Chinese and U.S. negotiators make further progress in negotiations to avoid trade war

Chinese and U.S. negotiators made “new progress” in trade negotiations as both sides discussed the wording of an agreement that’s designed to resolve a bilateral trade dispute. As China and the U.S. near agreement, officials on both sides are keen to maintain an appearance of equality between the two sides, which explains the focus on matching visits to Beijing and Washington. The positive news will come as some relief to global markets, which have feared a slowdown in economic growth.

Consumers hit with big increase in CCL rates from 1 April 2019

In the March 2016 Budget, the government announced it would scrap the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) at the end of the 2018/19 compliance year. The government is therefore increasing the CCL rate – which is an environmental tax on energy delivered to non-domestic users – from 1 April 2019 to recover the revenue from abolishing the CRC. CCL increases:

  • from 0.583p/kWh (since April 2018) on electricity bills to 0.847p/kWh from April 2019 back down to 0.811p/kWh from April 2020;
  • from 0.203p/kWh (since April 2018) on gas bills to 0.339p/kWh from April 2019 and up again to 0.406p/kWh from April 2020.

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Disclaimer: 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.