Price Risk Report - 1 May 2019

Last Month Summary

UK gas and electricity prices rose overall during April. Gas prices ended the month 7.3% higher at 1.63 p/kWh as an unexpected drop in Norwegian gas pipeline flows to the UK and Continental Europe meant gas networks were more reliant on gas storage withdrawals and LNG imports to meet demand. Colder temperatures last week also increased Britain’s heating demand, leaving the UK gas system undersupplied.

A rise in gas and carbon prices has increased the cost of burning fossil fuels for power generation, driving wholesale electricity prices 7.3% higher to 5.24 p/kWh. EDF energy also announced it was extending an outage at its Hunterston B8 nuclear reactor by two weeks while the nuclear regulator assesses whether it is safe to restart after cracks were discovered last year.

Brent crude oil prices rose 6.6% to $72.06/bbl, a 6-month high, as Libyan civil war threatens supply in the Middle East. Libya was the 20th largest petroleum producer in 2018, at more than a million barrels per day. U.S. sanctions on Iran and Venezuela and the ongoing supply cuts from OPEC also drove crude oil prices above $72 for the first time since November, with many market participants expecting prices to reach $75/bbl fairly soon.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø If temperatures across Northwest Europe continue to climb during May, 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, but colder temperature forecasts for the start of May is contributing to supply risks, causing volatility in prices. Rising crude oil and carbon prices, as well as future gas and power outages, could still drive prices higher later in the summer.

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.

Beond Rolling Annual Indices since Jan-07

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

Ofgem to introduce tougher tests for new suppliers starting in June

Small energy suppliers will have to undergo more stringent tests before they can set up shop in the UK under plans drawn up by the regulator after a spate of recent failures. Ofgem confirmed that new tests for energy suppliers entering the market will be rolled out from June this year; and applicants will have to demonstrate sufficient funding, provide a customer service plan and pass a fit and proper test.

The list of failed suppliers has grown rapidly over the past six months. Brilliant Energy, Our Power, Economy Energy, Spark Energy, Extra Energy, Future Energy, National Gas and Power, Iresa Energy, Gen4U, OneSelect and Usio Energy have all gone bust.

Oil hit $72/bbl as OPEC production cuts and U.S. sanctions continue to bite

Brent crude oil prices rose 6.6% to $72.06/bbl as ongoing OPEC production cuts and U.S. sanctions on Iran and Venezuela. In March, Venezuela’s oil production plunged by 289,000 bpd, falling to just 732,000 bpd. However, OPEC officials are rethinking the extension to production cuts beyond June. The swiftness of the rebalancing effort has surprised OPEC. While OPEC committed to reducing production by 1.2 million bpd since the start of this year, U.S. sanctions have knocked even more supply offline.

EU grants UK six-month extension to Brexit until 31 Oct 2019

European Union leaders granted the UK a 6-month extension to Brexit. The new deadline of 31 October 2019 averts the prospect of the UK having to leave the EU without a deal on Friday, as MPs are still deadlocked over a deal. Theresa May, who had wanted a shorter delay, said the UK would still aim to leave the EU as soon as possible. The UK must now hold European elections in May, or leave on 1 June without a deal.

China and U.S. hold 'productive' trade talks in Beijing in bid to avoid escalating trade war

China and the United States held “productive” trade talks in Beijing as the two try to end their trade war. The question of whether and when U.S. tariffs on $250 billion (£191.7 billion) worth of Chinese goods will be removed will probably be among the last issues to be resolved. U.S. President Donald Trump has said that he may keep some tariffs on Chinese goods for a “substantial period”. The United States has also been pressing China to further open up its market to U.S. firms. China has repeatedly pledged to continue reforms and make it easier for foreign companies to operate in the country.

Registration open for £60m Contracts for Difference auction for less established technologies

The registration process for the next Contracts for Difference (CfD) scheme auction is now open. It is in preparation for the third CfD auction round, expected to be opened by May 2019, as indicated by the Department for Business, Energy & Industrial Strategy (BEIS). Projects will compete for an annual budget of £60 million for delivery years 2023/24 and 2024/25 – the capacity is to be capped at 6GW.

Only less established technologies will be eligible, including anaerobic digestion, biomass with combined heat and power (CHP), geothermal, offshore wind, tidal stream and wave power. The scheme is part of the government’s strategy towards delivering “diverse, clean, secure and affordable power” in the transition to a low carbon economy.

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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.