UK gas and electricity prices fell overall during May. Gas prices ended the month 5.0% lower at 1.54 p/kWh as milder temperatures across both the UK and Western Europe, as well as returning gas supply capacity from Norway left the supply-demand balance as much as 32 mcm/d oversupplied. The return to service following scheduled annual maintenance of the Kollsnes processing plant and Troll gas field increased pipeline imports from Norway by around 42 mcm/d.
Meanwhile, Russia’s energy minister Alexander Novak confirmed the Nord Stream 2 pipeline project was still on schedule to be completed in the next 6-9 months despite the U.S. threatening to impose sanctions. Once completed the 1,200km gas pipeline will supply up to 55 bcm of gas a year to Europe, doubling the capacity of the existing Nord Stream. The decline in gas, coal and carbon prices reduced the cost of burning fossil fuels for power generation, driving wholesale electricity prices 3.2% lower to 5.01 p/kWh.
Brent crude oil prices fell 7.2% to $66.87/bbl as the U.S.-China trade conflict dampened the demand outlook for crude oil. However, if global inventories fall and demand remains strong, Kuwait’s oil minister Khaled al-Fadhel expects the oil market to be in balance towards the end of 2019.
|Bearish price drivers||Bullish price drivers|
|Ø If temperatures across Northwest Europe continue to climb during June, power demand for heating could be lower ahead of the summer months.
Ø Lower gas demand from Asia means LNG has been freed up to supply gas networks in the UK and Continental Europe. An increase in LNG deliveries into UK terminals will help drive energy prices lower.
Ø There are currently no major concerns over power generation outages in Northwest Europe to impact capacity next Winter.
|Ø Rising crude oil prices are likely to be a key driver for forward gas and power prices, driven primarily by OPEC production cuts.
Ø The end of production at EDF’s 2,000MW Cottam coal-fired power plant in September could add to Britain’s supply risk heading into Winter 2019/20.
Ø Despite recent volatility, the start of the Market Stability Reserve is expected to gradually drive the price of carbon allowances above €25/tCO2,.
Recommendations: Temperatures are trending upwards, helping to reduce supply risks. Rising crude oil and carbon prices, could still drive prices higher later in the summer. But short-term weakness could mean lower prices for the next month or so.
As a result, energy users renewing later in 2019 or early 2020 should considering starting their renewal processes as soon as possible, to make sure all energy contracts are locked in before the end of June. It is possible that prices may decline in July, but the possibility of major gas or power outages driving up prices this close to Winter 2019/20 means the risks of waiting this long outweigh the potential benefits.
Britain is importing a tenth of its electricity needs for the first time as the new subsea power link with Belgium, Nemo link, which which started operating at the end of January has increased the capacity of Britain’s electricity connections with mainland Europe by a third. Imports hit record highs in February and March as the new interconnector and existing links with France and the Netherlands provided access to buy cheap electricity from the Continent.
More links to France and Ireland are in the pipeline, followed by longer cables to Norway, Denmark and Germany. Norway has one of the cleanest electricity systems in the world, as their abundant mountain ranges mean they run on 95% hydro power. Denmark and Germany are renowned for their large shares of wind power, but these are backed up almost exclusively by coal, or its even dirtier cousin, lignite.
Brent crude oil prices fell 7.2% to $66.87/bbl as the U.S.-China trade conflict dampened the demand outlook for crude oil. However, if global inventories fall and demand remains strong, Kuwait’s oil minister Khaled al-Fadhel expects the oil market to be in balance towards the end of 2019. Meanwhile, official data from the U.S. Energy Information Administration (EIA) showed that crude inventories rose by 4.7 million barrels last week, versus expectations for a decline of nearly 600,000 barrels. Rising U.S. shale oil production contributed to these gains.
Prime Minister Theresa May announced that she will step down as the leader of the Conservative Party on 7th June, paving the way for a new prime minister to be appointed by the end of July. Foreign Secretary Jeremy Hunt has become the latest MP to say that he will run, joining Boris Johnson, Esther McVey and Rory Stewart. More than a dozen other MPs are believed to be seriously considering entering the contest.
The British currency is seen as more vulnerable to economic turmoil amid the growing impact of the escalating trade war between the U.S. and China. The Euro was among the strongest risers against the Dollar following news the White House had increased tariffs on some Chinese goods exports to the U.S. China has said it will retaliate against the U.S., but talks between the two countries are still ongoing so there remains some chance the whole situation can be brought back under control.
Government plans to run a capacity market (CM) auction in February 2020 for delivery in 2022/23. It intends to allow renewables to bid for contracts and make changes to methodologies that govern de-rating factors for interconnectors. All of which is subject to successfully re-instating the CM following its suspension by the European Commission, which upheld a legal challenge by Tempus Energy over the treatment of demand-side response. The Department for Business, Energy and Industrial Strategy (BEIS) said the Commission is likely to have made a decision by early next year. If that happens, the T-1 auction will take place a week after the T-3.
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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.