Price Risk Report - 1 November 2018

Last Month Summary

UK gas and electricity prices both fell during October. Gas prices ended the month 8.8% lower at 2.14 p/kWh as above seasonal normal temperatures, an increase in Norwegian and North Sea gas pipeline flows and strong wind output left the UK gas system oversupplied. This allowed storage operators in Britain to completely refill gas storage facilities. A number of LNG deliveries during October also supported UK supply, reducing UK supply risks for the upcoming winter months.

An end to French nuclear outages lowered concerns that Britain’s cross-channel neighbors would be able to supply excess electricity via sub-sea interconnectors during times of peak demand. As such, electricity prices declined 8.5% to 5.95 p/kWh.

Brent crude oil prices dropped 8.2% to $75.91/bbl, as both OPEC and the International Energy Agency lowered their 2019 oil consumption forecasts. At the same time, OPEC and Russia managed to raise their crude oil output by 132,000 bpd and 150,000 bpd, respectively, to help offset production losses from Iran and Venezuela.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø If temperatures across North West Europe remain broadly above seasonal normal levels through November and into the winter months, power demand for heating could be lower than normal for this time of year.

Ø Gas storage levels in Northwest Europe have caught up with historic levels, meaning countries will be more easily able to react flexibly to sudden peaks in demand.

  Ø Temperatures are likely to be a key driver, and if the winter chill continues beyond the end of February gas stocks could run low, boosting energy prices.

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.

Ø Carbon prices have dropped in recent weeks, but a return above €20/tCO2, could push UK gas and power markets higher.

 

Recommendations: Despite last month’s price drops, wholesale prices remain high, meaning that contracts for 2019 delivery could move lower. However, the combination of multiple supply risks means that markets could experience further volatility during Britain’s coldest months. Much will depend on winter temperatures, which are very difficult to predict.

Current supply and demand risks remain extremely unpredictable. As a result, energy users with contracts renewing before the end of March may want to consider securing their contracts by the end of November. The potential for higher EU carbon prices and unscheduled supply disruptions means that UK electricity and gas prices are still at risk of rising higher ahead of April 2019 renewals.

Beond Rolling Annual Indices since Jan-07

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

Cuadrilla resumes fracking after minor tremor halted operations

Cuadrilla restarted fracking at its site in Lancashire last week after a minor tremor brought it to a halt towards the end of the month. The temporary halt came just a week after the company started the operation at the Preston New Road site – the first operation to take place in the UK in seven years. Cuadrilla said: “Local residents should be reassured that the monitoring systems in place are working as they should. These are tiny seismic events that are being detected by our monitors as we fracture the shale rock and are not capable of being felt, much less cause damage or harm.”

However, environmental group Frack Free Lancashire said: “Local residents are rightly concerned by these events and the fact that the system has had to halt operations just a week into the process.

Oil falls under $76/bbl as markets adjusts to U.S. sanction against Iran’s oil exports

Brent crude oil prices fell 8.2% to $75.91/bbl, after both OPEC and the International Energy Agency (IEA) lowered their 2019 oil consumption forecasts. The news came despite the imminent imposition of U.S. sanctions against Iran being just a few weeks away. Iran’s oil output is already estimated to be down to 3.45 million bpd – a 150,000-bpd decline from August. It was reported that in September, OPEC and Russia managed to raise their crude oil output by 132,000 bpd and 150,000 bpd, respectively, to help offset production losses from Iran and Venezuela.

Pound weaker during October on concerns no-deal Brexit looking more likely

The Pound Sterling was weaker over the last month reflecting concerns a no-deal Brexit is looking increasingly likely. Philip Hammond announced the end of austerity in his third Budget, but warned Eurosceptics that a brighter future of tax cuts and higher public spending will be wrecked if Britain does not secure a good Brexit deal. Mr Hammond, buoyed by an unexpected £13bn windfall of higher-than-expected tax receipts, will loosen the public spending taps with more money for strained public services, including an extra £2bn a year for mental health.

Italy’s economy reports no growth at all in third quarter of 2018

Italy’s economy came to a standstill in the third quarter of the year, registering no growth at all. It comes as the new coalition government is arguing with the European Commission over the need for an expansionary budget to boost growth. Meanwhile, figures from the European Union showed economic growth in the 19 countries using the euro currency slowed to 0.2%, half of the 0.4% growth that had been forecast.

UK fuel duty to be frozen for ninth year in a row

Prime Minister Theresa May has confirmed fuel duty will be frozen for the ninth year in a row. The PM made the announcement during her speech at the Conservative Party Conference in Birmingham, adding it will put “money in the pockets of hard-working people”.

Fuel duty is a tax paid on most fuels and currently stands at 57.95p per litre of petrol, diesel, biodiesel and bioethanol. VAT of 20% is also charged on most fuels.

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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.