Price Risk Report - 1 February 2018

Last Month Summary

UK gas and electricity prices were broadly bearish during January, as milder temperatures and strong wind output reduced demand for natural gas. Medium Range Storage (MRS) stocks are currently at a healthy level with no immediate disruptions to supply expected. Low domestic consumption combined with strong supply from the Continent in January have further boosted the inventory with injections expected this week. Withdrawals from Rough remains static at around 8 mcm/d.

At various time there were four nuclear units offline for scheduled maintenance and refueling, however a fifth unit, the 480 MW Hunterston B-7 unit, was also briefly shutdown in an unplanned outage. As a result, gas prices fell 5.5% to 1.58 p/kWh, with electricity prices down 4.2% to 4.59 p/kWh.

Brent crude oil prices rose to their highest level since late-2014 as crude stockpiles have fallen and market participants have focused on geopolitical risk in producer countries. As a result, the benchmark Brent crude contract increased 2.9% month-on-month to $68.89/bbl.

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 Following a major outage at the North Sea Forties pipeline, UKCS gas production has been ramping up.

Ø An increase in LNG imports is expected to support supply during times of higher demand.

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 pipeline gas or nuclear outages, could both harm Britain’s ability to meet power demand during times of peak UK gas and power consumption.

What to watch out for: Even brief withdrawal outages at Rough could cause price spikes during the colder February period. In fact, any notable supply disruption is likely to drive short term prices higher quickly once colder weather tightens Britain’s supply margin. However, temperature forecasts are not predicting Britain’s weather to be especially cold. This could mean a dip in prices towards the end of Q1-2018.

Recommendations: Depending on you approach to risk, clients renewing from April onwards may wish to hold fire until mid-March to lock in any remaining contracts or volumes, as temperatures are expected to rise.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 February 2018
Source: Beond Analysis, Reuters

Drax greenlights conversion of 4th generation unit to biomass by end of 2018

Drax has said the government’s decision to continue supporting biomass technologies means it will convert a fourth unit at its power plant from coal to wood chip-fired generation. The energy giant had feared government proposals to cap the level of subsidies that power stations converted to biomass (and co-fired generators can receive through the Renewables Obligation Certificate scheme) could scupper its expansion plans. The firm seeks to convert further units as a response to government plans to phase out all unabated coal power by 2025.

The conversion is expected to be completed during the second half of 2018. The unit will likely operate with lower availability than the three existing converted units, but the intention is for it to run at periods of higher demand, which are often those of higher carbon intensity, allowing optimisation of ROC generation across three ROC accredited units. The CfD unit remains unaffected.

Oil traded above $70/bbl to hit its highest level since 2014, on falling stockpiles

Oil has increasingly found support as crude stockpiles have fallen and market participants have focused on geopolitical risk in producer countries. U.S. president Donald Trump is expected to make a decision on whether to extend a suspension on sanctions against Iran this week. Meanwhile, official government data from the EIA also showed US production fell by 290,000 bpd to 9.5 million bpd, likely due to a cold snap across the country.

Pound jumps to post-Brexit high on UK employment growth

The Pound Sterling surged to a new post-Brexit vote high against the US dollar, after the Office for National Statistics revealed strong employment figures. UK employment rose 102,000 in the three months to November, totalling 32.2 million, boosting the employment rate to 75.3%. Markets have been pricing in the potential for a messy departure from the European Union, and even a no-deal scenario. The Pound has strengthened as the latter eventuality appears to have become increasingly unlikely. David Davis, the Brexit minister, told MPs on Wednesday that he expects to agree to a transition deal by the end of March.

Suggestions of 2nd Brexit referendum welcomed by EU

The prospect of a second referendum has suddenly grabbed the attention of political news after Nigel Farage suggested a second referendum on EU membership was a good idea. The idea has since been further advanced by comments from Donald Tusk, President of the European Council, who last week said that the British would be welcomed if they changed their mind on Brexit.

Triad export rates to be cut by a third this year after High Court refuses temporary injunction

Firms challenging Ofgem’s decision to make deep cuts to Triad export rates have been refused a temporary injunction to stop the decision from coming into effect from 1 April. The companies sought the injunction ahead of the T-1 Capacity Market (CM) auction, which starts on Tuesday.

Lower Triad export payments will affect small generators’ CM bidding strategies. If they earn a lot for exporting power during times of transmission system stress (Triad payments), they can bid lower in the auction. As it stands, they no longer have that advantage.

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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.