UK energy prices had mixed messages during May. Milder weather forecasts for the next month reduced expected heating demand, weakening both spot and forward gas prices. The end of maintenance at Norway’s Troll gas field also meant an increase in pipeline flows via Langeled, supporting bearish sentiment via higher gas supplies. As a result, gas prices declined 0.3% to 1.45 p/kWh.
However, UK electricity reacted to the bullish German power market and European carbon prices. Despite record levels of Solar PV power production, the inconsistent nature of renewables means risks continue to exist during times of peak demand. Month-on-month forward electricity prices rose 1.3% to 4.32 p/kWh.
Oil prices were volatile throughout May with bearish sentiment winning in the short-term. Brent closed the month at $50.31/bbl after a drop of 2.3%. Libyan output was recovering after unexpected oilfield maintenance, fuelling concerns that OPEC-led output cuts on reducing global inventories were being undermined by producers outside the deal.
Coal prices lifted 0.1% to $66.60/tonne, while the cost of European carbon permits surged 11.6% to €4.98/tonne.
|Bearish price drivers (ê)||Bullish price drivers (é)|
|Ø Warm weather means any excess gas can be imported into medium range storage facilities in readiness for higher consumption during winter.
Ø Stronger Pound versus the US dollar and euro expected if Conservatives wins the general election, making pipeline gas and LNG imports (priced in $) cheaper for UK buyers.
Ø Negative EU-rhetoric from major political candidates in France, the Netherlands and Germany could weaken the euro, making gas imports cheaper for Britain.
|Ø Reduced LNG deliveries into Britain could force gas withdrawals from storage to balance the system.
Ø Rough’s injection ban could result in difficulties for the UK balancing the gas system during colder winter months. A short system during times of high demand could push prices higher.
Ø Extension to oil production cuts across OPEC and non-OPEC countries (incl. Russia) until March 2018 (could be extended further until June 2018) could reduce the supply of oil by up to 2%, reducing the global oversupply.
What to watch out for: Despite strong LNG supplies for much of May, LNG deliveries dropped off towards the end of the month. With limited storage capacity available for peak winter months, the UK will be more reliant on LNG cargoes and Norwegian gas imports than normal.
Recommendations: Despite a dip in oil prices during May, OPEC has agreed to extend production cuts until March 2018. Bullish oil support and Britain’s precarious gas storage position means we expect broadly bullish UK gas and electricity prices going forward. We recommend that energy consumers may well benefit from locking out contracts or hedge flexible volume for up to three years immediately.
Solar PV set a new record for electricity generation on Friday 26 May, producing 8.7 GW at midday, equating to 24.3% of the electricity being used at the time. This also marked the first time solar has generated more than nuclear power, and was second only to gas.
A flurry of new PV plants installed in recent years takes the total installed solar capacity to 12.1 GW. In 2015 and 2014 alone the install figures reached 4.13 GW and 2.55 GW respectively, whereas 2016 saw only 1.94 GW of capacity added, as the UK ROC program was wound up and the new Contract for Differences scheme for large–scale renewable projects has not been particularly favourable for solar.
OPEC has reached an accord to extend cuts to crude oil production until March 2018. With over a dozen other countries expected to join the cartel’s efforts, the agreement is likely to cut off about 2% of the world’s oil supply over the next nine months, extending a decision the OPEC-led coalition reached last year.
OPEC has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion. However, US oil producers are expected to continue ramping up output during 2017, potentially offsetting more than half of the cuts laid down by OPEC.
The Pound Sterling dropped to a five-week low towards the end of May after a controversial study published in the Times predicted the Conservative Party could lose its majority position in the British Parliament in next week’s general election. While analysts are generally skeptical about the reliability of the prediction, the Pound has suffered as a result of the conflicting projections of the election outcome – a result of the failure to predict the scale of the Conservatives comfortable 2015 election win.
Also fueling market volatility, the Office of National Statistics revised down the UK’s growth in Q1-2017 to just 0.2%, despite traders anticipating the figures to remain unchanged from their draft release last month when the statistics agency estimated a 0.3% expansion.
US policymakers are trying to read a mix of signals from the US economy, as the country extends one of the longest streaks of economic growth in its history. The markets remain conflicted, with a rise in consumer spending announced around the same time as a dip in consumer confidence.
Consumer spending grew 0.4% from March to April, picking up after a soft start to the year. However, the annual inflation rate was 1.7% – remaining below the 2% target set by policymakers.
After lengthy delays, Project Nexus finally got underway on 23 May with the transition expected for completion on 6 June, when the gas industry should begin to be able to determine the impact of the programme on energy networks, suppliers and end consumers.
The total cost of fully delivered gas bills are expected to remain relatively unchanged, with the majority of improvements going on behind the scenes:
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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.