Price Risk Report - 1 August 2017

Last Month Summary

UK energy prices were broadly bullish during July, as summer gas maintenance and continued gas storage concerns emphasized supply risks. Despite a number of LNG deliveries throughout July, cargoes are forecast to drop off during August putting pressure on medium range storage, which is currently filled to 69% of capacity. As a result, gas prices rose 2.5% to 1.45 p/kWh. The UK electricity market tracked gas and coal prices higher, although the Capacity Market scheme has theoretically guaranteed generating availability during peak winter consumption periods, limiting gains. Overall, forward electricity prices lifted 0.7% to 4.38 p/kWh.

Oil prices were bullish last month, surging 9.3% to hit a two-month high at $52.65/bbl, driven by the threat of US sanctions against Venezuela’s oil sector, who are currently producing around 2 million bpd of crude. The US is considering imposing sanctions on Venezuela’s vital oil sector in response to Sunday’s election of a constitutional superbody that Washington has denounced as a “sham” vote.

Coal prices jumped 5.7% to $74.25/tonne, while European carbon permits rose 3% to €5.18/tonne.


Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø Rough’s gas storage closure means that the facility will not need to be refilled during any future Summer seasons, reducing overall gas demand during these warmer periods.

Ø Stronger Pound versus the US dollar and euro expected if Bank of England raises interest rates, making pipeline gas and LNG imports (priced in $) cheaper for UK buyers.

Ø Further deliveries of US LNG to British terminals would provide improve the UK’s security of supply.

Ø Rough’s closure means a loss in supply flexibility, and could add a significant supply and price risk during the coldest periods of winter when heating demand is at its peak.

Ø Disruptions to Qatari LNG deliveries would force Britain to pay higher price premiums to European gas suppliers.

Ø Declining output at the Groningen gas field, due to production limits imposed by the Dutch government, could increase competition for gas in Europe during winter months.

What to watch out for: Qatar’s neighbours have not given any direct indication of what would happen if Qatar does not comply with sanctions, however if the geo-political conflict in the Gulf escalates further there is a risk that the countries LNG deliveries to Europe could be impacted. With the closure of Britain’s Rough gas storage facility, we will be looking out for further disruptions from any of Britain’s foreign gas supply partners as a prolonged outage could spike prices.

Recommendations: Britain’s precarious gas storage position means we expect broadly bullish UK gas and electricity prices going forward. The opportunity for customers to benefit from lower prices is fairly limited, while the cost of higher prices would be far more severe. Considering both the potential benefits and risks, we once again recommend that energy consumers should consider locking out contracts or hedge flexible volume for up to three years immediately.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 August 2017
Source: Beond Analysis, Reuters

Isle of Grain receives UK’s first ever LNG cargo from the US

The UK received its first big US LNG shipment towards the start of July, as growing US supplies of the super-cooled fuel find new buyers in Europe. The LNG cargo from the Sabine Pass facility in the Gulf of Mexico arrived at the Isle of Grain terminal on 8 July, carrying enough gas to meet around half the UK’s average daily summer demand.

The arrival of the long-awaited inaugural cargo comes amid rising gas supply concerns after Rough Storage operator Centrica said it would shut the country’s most important gas storage facility after 30 years of use. The decision has reduced Britain’s total available gas storage capacity by 72%, and will mean UK buyers will have to rely on alternative foreign suppliers to meet demand during the coldest months during the coming winter.

Crude oil breaks above $52/bbl, as US threatens oil sanctions against Venezuela

The United States is considering imposing sanctions on Venezuela’s vital oil sector in response to Sunday’s election of a constitutional superbody that Washington has denounced as a “sham” vote. It is possible that the US could block sale of lighter US crude that Venezuela mixes with its heavy crude and then exports.

Oil gains were also supported as Saudi Arabia vowed to reduced exports from next month and OPEC called on members to boost compliance with agreed output cuts to help curb oversupply and support flagging crude prices.

Pound hits $1.31/£ ahead of Bank of England interest rate decision

Britain’s pound traded above $1.31 towards the end of July, close to a 10-month high, as investors eyed the Bank of England’s next Monetary Policy Committee (MPC) on Tuesday when policymakers will decide on whether to hike interest rates for the first time in more than a decade.

Sterling has been supported in recent weeks by expectations the Bank might finally be getting ready for a hike after a series of hawkish comments from policymakers. However, as concerns over growth in the UK economy remain Governor Mark Carney and most of his top officials seem set to remain in wait-and-see mode. Economists are generally expecting a 6-2 majority in favour of holding the base rate at 0.25%.

US economy growth picks up on rising exports and investment

Economic growth accelerated in the US in the three months to June as extra investment growth helped drive the economy onwards. Consumption and exports also added to the expansion – GDP increased by 2.6% on an annualised basis during Q2-2017, gathering steam from the 1.4% expansion in the previous three-month period. Economists said extra energy investment led the improvement.

By contrast, the US dollar had a tougher time, dragged lower by disappointing economic data that has weakened the argument for further tightening by the Federal Reserve, as well as political uncertainty from the White House.

Green levy exemption for EIIs to increase costs for non-EIIs from 1 Jan 2018

The Government’s planned exemption for energy intensive industries (EIIs) from some of the costs associated with green energy policies will now be implemented from 1 January 2018. Until then, EII businesses will continue to receive rebates from the Department of Business, Energy & Industrial Strategy, for the costs of RO applied to your electricity bill by suppliers.

However, as green energy support schemes are paid for by billpayers, the exemption for EIIs is expected to result in additional costs for all other electricity customers. Non-exempt businesses are expected to see a rise of between 0.2%-0.6%.

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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.