UK gas and electricity price movements were mixed during November. Gas prices ended the month 2.0% lower at 2.08 p/kWh as above seasonal normal temperatures, strong gas pipeline flows and increased LNG imports left the UK gas system oversupplied.
EDF Energy unexpectedly extended an outage at its Hunterston B-7 nuclear reactor in Britain until February 2019 as a result of ongoing testing. The reactor, which has a capacity of 1,220MW, has been offline since March when cracks were found in its core during a routine inspection. As such, electricity prices rose 1.2% to 5.98 p/kWh.
Brent crude oil prices dropped 20.7% to $59.51/bbl, as investors worried about oversupply after the United States said it will temporarily exempt eight countries (China, India, South Korea, Turkey, Italy, the United Arab Emirates, Japan and Taiwan) from Iran-related sanctions. The waivers could allow top buyers to keep importing Iranian oil after economic penalties come back into effect on 5th November.
|Bearish price drivers||Bullish price drivers|
|Ø If temperatures across North West Europe remain broadly above seasonal normal levels through November and into the winter months, power demand for heating could be lower than normal for this time of year.
Ø Gas storage levels in Northwest Europe have caught up with historic levels, meaning countries will be more easily able to react flexibly to sudden peaks in demand.
|Ø Temperatures are likely to be a key driver, and if the winter chill continues beyond the end of February gas stocks could run low, boosting energy prices.
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 Carbon prices have dropped in recent weeks, but a return above €22/tCO2, could push UK gas and power markets higher.
Recommendations: Wholesale prices remain high, meaning that contracts for 2019 delivery could move lower. However, the combination of multiple supply risks means that markets could experience further volatility during Britain’s coldest months. Much will depend on winter temperatures, which are very difficult to predict.
Current supply and demand risks remain extremely unpredictable. As a result, energy users with contracts renewing before the end of March may want to consider locking out their contracts before mid-December. The potential for higher EU carbon prices and unscheduled supply disruptions means that UK electricity and gas prices are still at risk of rising higher ahead of April 2019 renewals.
Shale gas has flowed for the first time at the UK’s only fracking site currently in operation, energy firm Cuadrilla says. Operations began at the Lancashire site in October for the first time since 2011 when it was suspended because of earth tremors. There have been suspensions of the renewed underground drilling operations after further tremors in the area.
Brent crude oil prices fell 20.7% to $59.51/bbl as oil supply, led by the United States, is growing more quickly than demand. The International Energy Agency expects non-OPEC output alone to rise by 2.3 million bpd this year.
Meanwhile, oil demand in 2019 is expected to grow at a rate of 1.3 million bpd. This has driven oil prices to their lowest level in more than a year, even as oil producers consider cutting production to try to stem a rising global surplus. OPEC is expected to start withholding output after a meeting planned for 6 Dec.
The Pound Sterling was weaker over the last month on skepticism over the terms of the government’s Brexit deal. After 20 months of negotiations the 27 leaders of the EU have approved an agreement on the UK’s withdrawal and future relations – insisting it is the “best and only deal possible”. They said the deal – which needs to be approved by the UK Parliament – paved the way for an “orderly withdrawal”. The UK Parliament is expected to vote on the deal on 11 December, but its approval is far from guaranteed.
On the Continent, Europe’s five-year economic expansion is facing a mid-life crisis as it copes with potential debt troubles in Italy, a U.S.-China trade war and the risk of a disorderly British exit from the European Union. New data showed Germany’s economy, the currency union’s largest shrank 0.2% in Q3 2018.
The European Court of Justice surprised the UK electricity market by ruling Capacity Market (CM) payments constitute illegal state aid. Payments to energy firms under the £1bn capacity market scheme have been halted until the government can win permission from the European commission to restart it.
The UK has also been blocked from holding any Capacity Market auctions for energy firms to bid for new contracts to supply backup power in the future. National Grid said ministers had instructed it to indefinitely postpone auctions that had been planned for early 2019. Business and Energy Secretary Greg Clark said the UK government was already in contact with the European commission and seeking state aid approval, so the Capacity Market could be reinstated.
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