Price Risk Report - 1 March 2018

Last Month Summary

UK gas and electricity prices were fairly volatile during February, but have ended the month little changed overall. An oversupply early in the month caused an early price drop, however Storm Emma is forecast to be the worst storm in 50 years as blizzards and snow cause chaos. Demand for gas on 28 February hit a six-year high as cold weather swept the UK.

In the same week that a number of pipelines carrying gas from Netherlands and Belgium encounter supply problems, the cold weather has forced National Grid to issue a gas deficit warning for 1 March. Suppliers have been asked to supply more, but in the event that there is still a deficit, large gas users such as industry and large businesses will be asked to use less gas.

Despite late surge in prices, gas prices ended the month 0.1% lower at 1.58 p/kWh, with electricity prices just 0.5% higher at 4.61 p/kWh.

Brent crude oil prices fell below $65/bbl for the first time since mid-December as rising U.S. production and a strong dollar sent oil prices sliding. As a result, the benchmark Brent crude contract increased 2.9% month-on-month to $68.89/bbl.

Energy Price Outlook

Bearish price drivers Bullish price drivers
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 Milder weather for UK and Continental Europe forecast for the second half of March

Ø Cold snap across UK and Continental Europe driving gas demand higher

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 pipeline gas or nuclear outages, could both harm Britain’s ability to meet power demand during times of peak UK gas and power consumption.

What to watch out for: Temperatures across the UK and Continental Europe are forecast to pick up around the second week of March. This could mean a dip in prices towards the end of March. However, if the current cold snap is extended prices for 1 April start may not fall as much as we might have predicted.

Recommendations: Depending on you approach to risk, clients renewing in April may wish to hold fire until the second half of March to lock in any remaining contracts or volumes, as temperatures are expected to rise. Looking further forward, clients with contracts starting from May onwards may well benefit from holding off until milder weather returns, causing UK electricity and gas prices to dip.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 March 2018
Source: Beond Analysis, Reuters

National Grid issues gas deficit warning for 1 March as demand hits 6-year high

National Grid has warned it may not have enough gas to meet UK demand on 1 March and has asked suppliers to provide more. In the event that there is still a deficit, large gas users such as industry and large businesses will be asked to use less gas. Consumers will only be asked to use less gas as a last resort if these measures do not work. Demand for gas on Wednesday hit a six-year high as cold weather swept the UK.

“This warning has been issued in response to a series of significant supply losses resulting in a forecast end of day supply deficit,” the National Grid announced. Some pipelines carrying gas from the Netherlands and Belgium have had problems this week. If suppliers are not able to meet demand, National Grid will ask certain people to stop using gas. First in line would be gas-fired power stations, then large industrial and business users.

Oil dips below $65/bbl on rising U.S. production and a stronger dollar

Brent crude oil prices fell below $65/bbl for the first time since mid-December as rising U.S. production and a strong dollar sent oil prices sliding. Oil ended the month down 6% at $64.73/bbl. U.S. government data showed weekly crude production jumping to a record 10.25 million bpd. Meanwhile, the nation’s stockpiles of crude rose for a second straight week.

With American output on the rise, concerns are creeping into the market that OPEC’s commitment with Russia and other major producers to limit global supply may be weakening.

Pound weakens after sluggish UK services growth

The Pound Sterling fell in value against the US dollar, after UK services sector reports sluggish growth. The UK services sector has seen a slowdown in January, with the PMI index dropping from 54.2 points to 53. This 16-month low reflects a marked waning in growth of demand for business and consumer-facing services such as hotels and restaurants.

EU growth beats expectations, predicting 2.3% expansion in 2018

Growth rates for the EU beat expectations last year as the transition from economic recovery to expansion continues. The EU economy is estimated to have grown 2.4% in 2017, the fastest pace in a decade. This robust performance is set to continue in 2018 and 2019 with growth of 2.3% and 2.0% respectively in both the euro area and EU.

T-4 Capacity March auction clears at just £8.40/kW with gas and nuclear dominating

National Grid has procured 50.41GW of electricity generation to be available for delivery in 2021-22, The auction finished with a clearing price of £8.40/kW per year. The T-4 price has fallen significantly since last year’s result of £22.50/kW but still manage to attract 2155MW of new interconnectors (ElecLink from France, IF2 from France and NemoLink from Belgium) 762MW of new small generators and 1160MW of new demand side response.

Operators of the Eggborough coal-fired power station in Yorkshire also announced in Feb that the plant will be shut down after failing to secure new Capacity Market contracts in the T-1 auction for delivery in 2018/19, which cleared at £6/kW.

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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.