UK gas and electricity prices rose during July, ahead of substantial scheduled outages impacting gas fields, pipelines and terminals across the UK Continental Shelf (UKCS) gas system. In just the first week of August there are scheduled gas field shutdowns at Cygnus (1-4 Aug) and Forties (3-7 Aug). Gas prices ended the month 1.7% higher at 2.03 p/kWh, with electricity prices rising 2.6% to 5.81 p/kWh.
A heatwave across the UK, much of Europe and Japan has seen a resurgent increase in total LNG imports with higher temperatures boosting the demand for gas to be used in power production. Temperatures last week hit 35.1°C in the UK and topped 41°C in Japan, maxing out demand for air conditioning and large-scale industrial cooling processes. With global gas supplies tighter than previous years, LNG is likely to be a key source of flexibility heading into the upcoming winter season.
In contrast, Brent crude oil prices slid 5.4% to $74.97/bbl, as Libya announced that four export terminals were back under state control after being handed back by rebels. The return could increase Libyan crude oil exports by up to 850,000 bpd. An increase in Saudi Arabia’s oil exports also meant that OPEC’s compliance with agreed oil output curbs had declined to around 120% in June from 147% in May.
|Bearish price drivers||Bullish price drivers|
|Ø Prices may decline as OPEC increases oil production by 1 million bpd increase in crude oil output, equivalent to around 1% of global supply.
Ø If European gas storages can be completely filled before colder weather kicks in, it will be easier to balance supply and demand during times of peak demand.
Ø Lower temperatures during August could reduce power demand for cooling, easy price pressure.
|Ø Unexpected pipeline gas or nuclear outages, could both harm Britain’s ability to meet power demand during times of peak UK gas and power consumption.
Ø Lower gas inventories across Northwest Europe mean demand from injections into storage facilities during summer months is forecast to be higher than during previous years.
What to watch out for: With only two months remaining until the start of the winter period, any major unscheduled outages are likely to create significant volatility in prices. UK and Continental European gas storage remains significantly lower than normal, meaning there is less flexibility in supply causing prices to be even more sensitive to unplanned pipeline and nuclear outages than in previous years.
Recommendations: Current supply and demand risks are more unpredictable than in previous years. As a result, energy users may want to consider securing their contracts within the next month or two. While it is possible that prices could dip in August, any unscheduled supply disruptions could create significant price volatility before the October 2018 contract starts, potentially making energy more expensive.
The government has confirmed plans to hold new Contracts for Difference (CfD) auctions for offshore and remote island wind projects, with the first to be held in May 2019. However, with no word on auction rounds or alternatives for established renewables, it looks as if utility-scale solar remains locked out of the process. Depending on the price achieved, CfD auctions would deliver between 1-2GWs of offshore wind each year in the 2020s, utilising £557 million of funding previously committed to CfDs.
A second allocation round will be held in 2021, with auctions to be carried out every two years thereafter, offering an improved clarity to the industry and helping to support meaningful long-term investments.
Brent crude oil prices fell 5.4% to $74.97/bbl, as Libya’s state oil company said it was reopening four key export terminals which had been handed back by rebel factions, suggesting an increase in oil exports. The return could increase Libyan oil exports by up to 850,000 bpd.
Separately, OPEC announced that Saudi Arabia had raised production by more than 400,000 bpd in June as it moved to try to cap a price rally and replace lost production from Venezuela and Iran. Saudi Arabia has faced pressure from big crude importers who worry about negative economic impacts from rising fuel costs.
The Pound Sterling declined in value against both the U.S. dollar and euro over the course of July as the European Commission issued a call to EU states for them to prepare for a ‘no-deal Brexit’, with the UK scheduled to leave the EU in March 2019. Dominic Raab, the new Brexit Secretary, also warned that Britain could refuse to pay the £39bn exit bill if a UK-EU trade deal is not agreed in time.
However, UK Government borrowing in Q2-2018 fell to its lowest quarterly level since 2007. According to the ONS, borrowing for the financial year so far has reached £16.8bn, £5.4bn less than in the same period in 2017.
U.S. President Donald Trump and European Commission chief Jean-Claude Juncker have agreed to work together to lower trade barriers, in an apparent breakthrough in the trade dispute. A joint statement said the two leaders agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. However, the critics argue the agreement was too vague and failed to eliminate issues with China.
A consultation launched recently by the UK Government sets out plans to end the Feed-in Tariff (FiT) scheme, closing it to new entrants. The FiT Scheme pays renewable energy generators and exporters for electricity they produce for the grid. The plans propose a strict cut-off date of 31 March 2019, with no special provisions for projects in oversubscribed areas. Without the closure, the FiT scheme would continue to see costs to consumers growing.
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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.