Price Risk Report - 1 January 2018

Last Month Summary

UK gas and electricity prices were broadly bullish in the lead up to Christmas, as colder temperatures boosted the potential gas demand from heating and gas-fired power generation. During the same period, supply concerns squeezed supply margins. A major outage at the North Sea Forties oil and gas pipeline saw a sudden 40 mcm/d drop in gas flows into the UK system, while the number of LNG cargoes arriving in Britain last month was also fairly low.

Over the holiday period, however, the flows through the Forties pipeline returned to normal allowing Medium Range Storage to inject gas at a rapid pace in preparation for higher demand during Q1-2018. As a result, gas prices only rose 0.9% to 1.68 p/kWh, with electricity prices up just 0.4% to 4.79 p/kWh.

Brent crude oil prices rose to their highest level since mid-2015 amid large anti-government rallies in Iran and ongoing supply cuts led by OPEC and Russia. Six days of protests in Iran have left at least 20 people dead, escalating tensions in oil-rich Iran. As a result, the benchmark Brent crude contract increased 6.9% to $66.94/bbl month-on-month.

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 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. However, temperature forecasts are not predicting Britain’s weather to be for the start of 2018 as originally expected. This could mean a dip in prices towards the end of Q1-2018.

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 January 2018
Source: Beond Analysis, Reuters

2017 ‘greenest ever’ for the UK, with 2018 on course to be even better

Increased reliance on renewable energy means the country has ‘never been cleaner or greener – and we are on course for an even better year in 2018’. 2017 saw many different renewable energy records broken. These “firsts” include the first full day since the Industrial Revolution without coal power. Other achievements include the most electricity produced from solar power at any one moment, and the most wind power produced in a day. Britain’s power system is the fourth cleanest in Europe and the seventh cleanest in the world.

Oil hits 2½-year high near $67/bbl amid protests in Iran and Libyan pipeline explosion

Brent crude oil prices surged to a 2½-year high as an explosion at a Libyan crude pipeline cut the country’s output by up to 100,000 bpd. The North African country’s output had been recovering in recent months after being held down for years amid armed conflict and unrest. Civil unrest in Iran also contributed to geo-political tension, boosting price risks in the Middle East. Iran is OPEC’s third largest crude producer.

However, the restart of Forties, a key North Sea pipeline, limited the extent of the rally. Following a sudden unplanned mid-Dec outage, oil and gas flows through the pipeline have been increasing gradually.

Brent rose 18% over the course of 2017, largely due to an agreement between OPEC and Russia to cut crude production by a combined 1.8 million bpd.

Pound records small gain as UK manufacturing expanded at a robust pace

The Pound Sterling has ended 2017 stronger against the US Dollar but treads water against the Euro as traders consider fresh manufacturing data. Sterling starts 2018 on a firm footing against the Dollar following news UK manufacturers continue to enjoy robust growth. Data from the CIPS confirmed a UK manufacturing PMI reading of 56.3, confirming impressive growth remains in place. Any figure above 50 indicates expansion over the month. However, the currency is locked at recent levels against the Euro which was earlier boosted by impressive German manufacturing data.

Eurozone manufacturing sector growth hits record

European factories have reported their strongest month since before the creation of the euro, capping off a much better than expected year for businesses in the single currency area. The eurozone manufacturing purchasing managers’ index in December hit 60.6, its highest level since surveys began in mid-1997, according to figures released on Tuesday.

UK gas suppliers propose urgent change to UIG charge after unexpected price impact

Corona Energy and Ørsted have launched urgent proposals to resolve the chaos caused by the new Unidentified Gas (UIG) charge that created significant contract uncertainty for business gas consumers towards the end of 2017. With the previous regime, the cost incurred through Unallocated Gas (UAG) cost for I&C customers was only between 1% and 2% of the total gas bill. However, in the new regime introduced by Project Nexus, the monthly costs reported by suppliers has been between 6% and 11%. A decision is expected by Ofgem by the end of February 2018.

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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.