Price Risk Report - 1 January 2019

Last Month Summary

UK gas and electricity prices fell overall during December. Gas prices ended the month 5.1% lower at 1.95 p/kWh as above seasonal normal temperatures in the UK, strong gas pipeline flows and increased LNG imports left the UK gas system fairly oversupplied.

Wholesale electricity prices also fell. However, losses were limited as five UK nuclear reactors remain offline, totaling 2.6GW of lost power capacity on the National Grid network. As such, electricity prices fell 0.8% to 5.90 p/kWh.

Brent crude oil prices dropped 9.5% to $53.80/bbl, as planned output cuts failed to alleviate fears about a global economic slowdown. The latest falls come after a difficult year for oil markets, as prices continue to plunge amid fears of a slowing global economy and record production in the United States and Iraq. OPEC has pledged to cut output in a bid to stabilise prices. The cut is set to come into effect this week.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø If temperatures across North West Europe remain broadly above seasonal normal levels through January and into the winter months, power demand for heating could be lower than normal for this time of year.

Ø The gradual return of Belgium’s nuclear reactors will reduce the demand for power capacity from the UK and Belgium’s neighbours.

Ø Falling oil prices could reduce the cost of gas imports from Russia and foreign LNG suppliers

Ø Temperatures are likely to be a key driver, and if the weather across the UK and Continental Europe gets colder as expected, higher demand could drive prices higher.

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 The start of the Market Stability Reserve has pushed the price of carbon allowances above €25/tCO2,, with further gains possible.

 

Recommendations: Winter supply risks still pose a threat, however with prices falling in recent weeks contracts for summer 2019 delivery could move lower. However, the combination of multiple supply risks means that markets could experience further volatility during January and February. 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. 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.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 January 2019
Source: Beond Analysis, Reuters

Nemo Link cable begins final phase of commissioning

The 1,000MW Nemo subsea power interconnector that links the UK and Belgium has officially been launched. Stretching 80 miles from Herdersbrug on the Belgian coast to Richborough in Kent, the £600 million Nemo Link will help deliver a more flexible energy system for consumers in both countries.

The project will enable trade of electricity between National Grid and Belgian transmission system operator Elia when it becomes operational in early 2019.

Oil falls under $60/bbl as IEA reveals oil supply is growing more quickly than demand

Brent crude oil prices fell 9.5% to $53.80/bbl as planned output cuts failed to ease fears about a global economic slowdown. The latest falls come after a difficult year for oil markets, as prices continue to plunge amid fears of a slowing global economy and record production in the United States and Iraq. OPEC has pledged to cut output in a bid to stabilise prices. Production cuts are set to come into effect this week.

Theresa May sets January date for MP’s vote on Brexit deal

MPs will vote on the UK’s Brexit deal in the week beginning 14 January, Theresa May has told Parliament. The vote was due to be held in December but was put on hold after May admitted she was set to lose. Announcing a new date, she said the European Union had made it clear the Irish backstop was “not a plot to trap the UK”, and urged MPs to see Brexit through.

Meanwhile, foreign secretary Jeremy Hunt has warned that cancelling Brexit through a second EU referendum would have “devastating” social consequences. However, concern over Northern Ireland’s border remains a point of particular contention.

Eurozone to experience lower economic growth in 2019, predicts Financial Times

An annual Financial Times survey has predicted that the eurozone will be marked by lower growth in 2019, along with political turmoil in Italy, the fallout from the UK’s Brexit talks and the choice of a new European Central Bank president.

The end of Mario Draghi’s eight-year term at the ECB will usher in a new president — and perhaps a new era of policymaking. The choice of a successor will still be subject to the usual EU political debate, but one name comes to the fore in the FT’s poll — Erkki Liikanen, the former head of the Finnish central bank.

Ofgem tightens rules for new energy suppliers after tumultuous year

The UK energy regulator Ofgem plans to make it more difficult for new energy suppliers to start trading as it looks to tackle a growing number of failed ventures and poor customer service among smaller players in the sector. Several small suppliers have gone bust in recent months, with strong market speculation that more will follow this winter.

Proposed rules for new energy suppliers will require applicants to demonstrate they have the money and the resource to operate for at least a year before being granted a license.

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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.