Price Risk Report - 1 December 2017

Last Month Summary

Much like October, UK gas and electricity prices were broadly bullish during November as colder temperatures and a number of UK nuclear outages boosted the potential gas demand from heating and gas-fired power generation. Rough continues to contribute a notable volume of gas into the UK system this winter, however with withdrawals already underway it is unclear how much would be left during February and March if temperatures decline and heating demand ramps up.

The number of LNG cargoes arriving in Britain last month was fairly low, with no immediate increase in deliveries forecast for December. With the reliability of Rough gas storage unclear, Britain is likely to be heavily reliant on LNG imports to balance the system. As a result, gas prices rose 5.6% to 1.66 p/kWh. The UK electricity market responded to bullish risks from the nuclear outages and also tracked gas, coal and European energy prices higher. Overall, forward electricity prices rose 2.3% to 4.77 p/kWh.

Oil prices were bullish last month, increasing 2.8% to $62.63/bbl, as OPEC agreed on 30 Nov to extend crude output cuts by nine months until the end of 2018 as it tries to finish clearing a global glut of crude while signalling it could exit the deal earlier if the market overheats.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø Rough’s gas storage continues to withdraw 0.868 bcm of cushion gas between early Oct and the end of March 2018, increasing Britain’s available supply.

Ø If deliveries of LNG cargoes to British terminals increases, this would improve the UK’s security of supply during winter.

Ø Despite the withdrawal of cushion gas, Rough’s closure still 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 Unexpected UK and French nuclear outages, could both harm Britain’s ability to meet power demand during times of peak UK power demand.

What to watch out for: Even brief withdrawal outages at Rough could cause price spikes during the peak winter period. In fact, any notable supply disruption is likely to drive short term prices higher quickly once colder weather tightens Britain’s supply margin. The Weather Company has already forecast that this could be the coldest winter since 2012-13. With snow and negative temperatures already hitting parts of Britain, prices could be bullish during December.

Recommendations: Clients with renewals before the end of February should ensure to secure their contracts immediately to avoid becoming subject to further winter price risks. However, depending on you approach to risk, clients renewing from April onwards may wish to hold fire until temperatures begin to rise.

Beond Rolling Annual Indices since Jan-07

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

Weather Company again forecasts Britain in for coldest Dec & Jan since 2012-13

Renowned weather agency, the Weather Company has predicted that Britain could be in for a very chilly winter with forecasters predicting Arctic winds and ice blasts across Britain. Meteorologists from the Weather Company say December and January are set to be colder than usual, and could well be the coldest since 2012-13. Snow and ice will be a much higher threat this winter, meaning that gas demand could be particularly high, testing Britain’s ability to attract sufficient gas supply from our overseas partners, particularly LNG from Qatar.

Brent crude oil tops $62.50/bbl as OPEC agree to extend cuts until end of 2018

OPEC agreed on Thursday to extend oil output cuts by nine months until the end of 2018 as it tries to finish clearing a global glut of crude while signaling it could exit the deal earlier if the market overheats. The producers’ current deal, under which they are cutting supply by about 1.8 million bpd in an effort to boost oil prices, expires at the end of March 2018.

Non-OPEC Russia, which this year reduced production significantly with OPEC for the first time, has been pushing for a clear message on how to exit the cuts so the market doesn’t flip into a deficit too soon, prices don’t rally too fast and rival U.S. shale firms don’t boost output further.

Pound hits 2-month high of $1.3475 as Brexit fears ease

The Pound strengthened to a two-month high at the end of the month, driven by hopes the UK had reached an agreement over a divorce payment to the EU and following reports that a deal over the Northern Ireland border was close to a breakthrough.

Sterling climbed to its strongest level against the dollar since late-September, building on a 0.5% gain in the previous session on reports that an agreement-in-principle had been reached over the EU’s demand for a €60bn settlement, opening the way for trade talks.

U.S. economy reaches maximum sustainable output for first time in decade

The U.S. economy posted its fastest growth in three years in Q3-2017, indicating a broad-based expansion is gaining momentum. This meant that the U.S. economy is running at its full potential for the first time in a decade. Essentially, total economic output in the third quarter was slightly above the maximum sustainable level of output as estimated by the nonpartisan Congressional Budget Office.

U.S. GDP growth revised up to 3.3% rate for Q3-2017, with more business investment in equipment and software, and heftier government spending.

Chancellor announces no new green subsidy schemes until 2025

In last month’s Autumn Budget 2017, Chancellor Philip Hammond announces that the Government would not be introducing any new green subsidy schemes until 2025. This may allow consumers to be protected from excessive increases in non-energy costs as we move into the early to mid-2020’s – an indicator that the continued financial pressure on energy consumers may start to ease.

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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.