Price Risk Report - 1 July 2017

Last Month Summary

UK energy prices had mixed messages during June. After some initial concerns, the Suez Canal Authority confirmed that Qatari LNG tankers would not be blocked despite geo-political sanctions imposed on the Middle Eastern Gulf country by its influential neighbours. The news meant four LNG tankers were expected to arrive at British LNG terminals within the next week. News of Rough’s gas storage closure had already been built into prices and as a result, gas prices declined 2.6% to 1.42 p/kWh. However, UK electricity reacted to the rising European power market and coal prices. While a dip in UK wind and solar power production also meant that forward electricity prices rose 0.6% to 4.35 p/kWh.

Oil prices were volatile throughout June with bearish sentiment winning in the short-term. Brent closed the month at $47.92/bbl after a drop of 2.4%. Libyan exports continued to recover, while Nigerian output is also expected to rise after Royal Dutch Shell removed limits on production at the country’s largest oil field, fuelling concerns that OPEC-led output crude oil cuts were still being undermined by producers outside the deal.

Coal prices jumped 5.5% to $70.25/tonne, while European carbon permits rose 1% to €5.03/tonne.

Energy Price Outlook

Bearish price drivers (ê) Bullish price drivers (é)
Ø Rough’s gas storage closure means that the facility will not need to be refilled during any future Summer seasons, reducing overall gas demand during these warmer periods.

Ø Stronger Pound versus the US dollar and euro expected if Bank of England raises interest rates, making pipeline gas and LNG imports (priced in $) cheaper for UK buyers.

Ø Rough’s closure 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 Disruptions to Qatari LNG deliveries would force Britain to pay higher price premiums to European gas suppliers.

Ø Declining output at the Groningen gas field, due to production limits imposed by the Dutch government, could increase competition for gas in Europe during winter months.

What to watch out for: Qatar’s geo-political conflict in the Gulf caused some initial delays to LNG deliveries through the Suez Canal, and an escalation of the situation could result in severe disruptions for one of Britain’s most imports gas supply routes. Combined with the closure of Britain’s Rough gas storage facility, further disruptions from any of Britain’s foreign gas supply partners could spike prices.

Recommendations: Britain’s precarious gas storage position means we expect broadly bullish UK gas and electricity prices going forward. The opportunity for customers to benefit from lower prices is fairly limited, while the cost of higher prices would be far more severe. Considering both the potential benefits and risks, we recommend that energy consumers should consider locking out contracts or hedge flexible volume for up to three years immediately.

Beond Rolling Annual Indices since Jan-07

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

National Grid predicts winter supply margin over 3.7GW thanks to Capacity Market

National Grid has forecast that Britain’s power network will have a significant supply margin this during Winter 2017/18, as payments will be made to 54.4GW of power generators through the Capacity Market scheme.

For the 2016/17 winter period National Grid obtained a de-rated capacity margin of 6.6%. However, in its recent Winter consultation report, National Grid said it expected the de-rated margin range for the winter period 2016/17 to be between 3.7GW and 4.9GW, equivalent to between 7.2% and 9.9% of transmission system demand.

Crude oil slides as rising US and Libyan production offsets OPEC cuts

US crude output is expanding as shale drillers continue to keep adding drilling rigs while Libyan oil production hit a record 4-year high of 885,000 bpd, roughly triple its production of only a year ago. Production limits in Nigeria have also been lifted meaning that the West African country’s oil exports are at full capacity for the first time in 16 months, increasing global supplies by a further 250,000 bpd in June.

Oil traders are resorting to storing more and more oil at sea, a sign the market is far from the kind of re-balancing that OPEC and its allies would have hoped for when the consortium set out last year to bring down global stockpiles. The quantity of oil stored in tankers reached a 2017 high of 111.9 million barrels earlier this month.

Pound hits $1.30/£ after Bank of England increases chance of interest rate hike

The Bank of England voted to keep interest rates at their record low of 0.25%. However, the Monetary Policy Committee (MPC) members were split 5-3 in favour of a hold, surprising financial markets. The other 3 committee members want to increase interest rates.

The Pound then surged after Governor Mark Carney said tolerance for higher inflation – aided by low interest rates – could soon start to disappear. The comments were taken as a major sign that the chief may soon vote for a rate rise. If the BoE votes for a rise at the next MPC meeting in August, the pound is expected to move even higher.

IMF cuts US growth forecast due to uncertain White House policies

The International Monetary Fund (IMF) has cuts its growth forecasts for the US economy due to uncertainty about White House policies. It now expects growth of 2.1% in 2017 and 2018, against earlier estimates of 2.3% in 2017 and 2.5% in 2018.

The forecast is also below the 3% rate targeted by the White House. Proposals such as cuts to spending on programmes that benefit low and middle-income households could lead to even slower growth, the IMF warned.

Ofgem proposes £206.8m spending cut for DNOs, potentially reducing DUoS charges

Ofgem has launched a new consultation, proposing to reduce allowances across all Distribution Network Operators (DNOs) by £206.8 million, potentially reducing the cost of Distribution (DUoS) charges in consumer bills. Ofgem’s consultation states the new financial adjustments reflect DNOs’ performance under the previous price control – which ended on 31st March 2015 – when electricity demand was “significantly lower than expected”. As a result, some DNOs did not need to spend as much as they expected on reinforcing their grids.

The DNOs also cancelled a number of major schemes and have spent less than expected on others where they found better ways to complete the work. The consultation will run until 14th August with a decision on any changes published by 30th September 2017. Any charging alterations could take affect from 1st April 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.