Price Risk Report - 1 November 2017

Last Month Summary

UK gas and electricity prices were broadly bullish during October, as colder temperatures and a number of UK nuclear outages boosted the potential gas demand from heating and gas-fired power generation. Rough is still expected to contribute a notable volume of gas into the UK system this winter, however a brief outage last month raised concerns that the gas storage facility could encounter further supply disruptions.

The number of LNG cargoes arriving in Britain last month was a marked increase, but the forecast for deliveries dropped in the last week. With the reliability of Rough gas storage unclear, Britain could be heavily reliant on LNG imports to balance the system, and the low number of expected deliveries for the first two weeks of November is enough to boost price risks. As a result, gas prices rose 3.5% to 1.57 p/kWh. The UK electricity market responded to bullish risks from the nuclear outages and also tracked gas, coal and European energy prices higher. Overall, forward electricity prices rose 2.8% to 4.67 p/kWh.

Oil prices were bullish last month, increasing nearly 6% to $60.94/bbl, over concerns that oil exports from Iraq’s Kurdish region could be severely disrupted, as well as comments from Saudi Arabia that signalled the likely extension of the supply cut deal between OPEC and non-OPEC members.

Coal prices surged 12.4% to $86.75/tonne as Chinese coal imports reported another increase.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø Rough’s gas storage has been granted permission to withdraw 0.868 bcm of ‘cushion gas’ between early Oct and the end of March 2018, increase Britain’s available supply.

Ø If deliveries of LNG cargoes to British terminals increases, this would improve the UK’s security of supply during winter.

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

What to watch out for: Even brief withdrawal outages at Rough could cause price spikes during the peak winter period. In fact, any notable supply disruption is likely to drive short term prices higher quickly once colder weather tightens Britain’s supply margin. The Weather Company has already forecast that this could be the coldest winter since 2012-13.

Recommendations: Clients with renewals before the end of February should ensure to secure their contracts immediately to avoid becoming subject to further winter price risks. However, depending on you approach to risk, clients renewing from April onwards may wish to hold fire until temperatures begin to rise.

Beond Rolling Annual Indices since Jan-07

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

Weather Company predicts Britain in for coldest Dec & Jan since 2012-13

It looks like we could be in for a very chilly winter with forecasters predicting Arctic winds and ice blasts across Britain. Meteorologists from the Weather Company say December and January are set to be colder than usual, and could well be the coldest since 2012-13. Snow and ice will be a much higher threat this winter, meaning that gas demand could be particularly high, testing Britain’s ability to attract sufficient gas supply from our overseas partners, particularly LNG from Qatar.

Brent crude oil tops $60/bbl for first time since 2015

Brent crude oil prices rose above $60/bbl for the first time since 2015, over comments from Saudi Arabia that signal the likely extension of the supply cut deal between OPEC and non-OPEC members. Saudi Arabia’s Crown Prince Mohammad bin Salman said: “We will support anything to stabilise the oil demand and supply”.

This is coming as the World Bank released its forecast that crude oil prices are to rise to $56/bbl in 2018 from $53/bbl this year as a result of steadily growing demand, agreed production cuts among oil exporters and stabilising U.S. shale oil production.

Pound broadly similar, but dip expected ahead of BoE interest rate hike

The Pound was relatively unchanged against the US dollar month-on-month; however economists expect a decline as the Bank of England is expected to increase interest rates for the first time in a decade, raising its benchmark by a quarter of a percentage point to 0.5% and signalling the start of a gradual increase in borrowing costs.

Voting seven to two in favour of the rate rise, the central bank’s Monetary Policy Committee intended to send a hawkish message that at least two further quarter of a percentage point rate rises would be needed over the next two years to control inflation.

U.S. economy on track for 4.5% annualised growth in GDP for Q4-2017

Based on recent economic data, the gross domestic product is headed for a 4.5% annualised growth pace in the fourth quarter. Importantly, officials at the Federal Reserve are keeping a close eye on growth as they nudge interest rates higher after nearly a decade of keeping rates slow to spur growth. The Fed’s rate setting committee meets at the start of November to make the latest tweak in the federal funds rate, a key benchmark lending rate for banks.

‘Consumers paying too much for energy’, says independent report by Oxford professor

According to a new independent study, UK businesses and consumers are paying too much for their energy as a result of the government’s green taxes, with costs “higher than necessary” to meet climate and carbon targets. Prof Dieter Helm, from Oxford University, was asked by the government to examine how to reduce energy costs while achieving climate change targets. He concluded that energy-users should have benefited more from falling costs and technical efficiencies. The government will now have to review his finding and decide how improvements can be made going forward.

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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.