Price Risk Report - 1 October 2017

Last Month Summary

UK gas and electricity prices were fairly stable during September, but ultimately ended the month lower. The key driver was news that Centrica had been granted permission by the Oil and Gas Authority to convert some so-called ‘cushion gas’ into working gas from the Rough storage site. The additional availability of gas during the peak winter period means there is less concern over the use of gas in storage in the immediate future.

The number of LNG cargoes arriving in Britain last month was limited, but this is expected to pick up during October with five deliveries forecast during the first two weeks. As a result, gas prices fell 0.5% to 1.52 p/kWh. The UK electricity market tracked gas, coal and European energy prices lower. Overall, forward electricity prices dipped 0.7% to 4.54 p/kWh.

Oil prices were bullish last month, surging nearly 10% to $57.54/bbl, as Turkey threatened to cut oil flows from Iraq’s Kurdistan region towards its ports. Turkey is trying to put more pressure on the Kurdish autonomous region over its independence referendum.

Coal prices dipped 0.4% to $77.15/tonne, while European carbon permits jumped 19% to €7.07/tonne.

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 An expected increase in LNG tanker deliveries to British terminals 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 Disruptions to LNG deliveries would force Britain to pay higher price premiums to European gas suppliers.

Ø EDF has been ordered to shutdown four French nuclear reactors for testing, reducing the surplus power available for Britain to import during times of peak UK power demand.

What to watch out for: With the additional gas available to Britain’s Rough gas storage facility, UK buyers should now be less reliant on foreign gas imports, particularly LNG, to meet peak winter demand. However, short term prices could rise quickly once colder weather forecasts hit the headlines.

Recommendations: There is still time for clients to secure all their remaining winter volume ASAP at a favourable price. However, depending on your approach to risk, clients with later contract start dates may prefer to wait until Spring to lock in.

Beond Rolling Annual Indices since Jan-07

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

Low-carbon power records all-time high share of UK electricity mix

The UK’s clean energy transition received a welcome boost this week as government figures revealed that low-carbon sources (this includes both renewables and nuclear power) reached a record-high 53.4% share of electricity generation during Q2-2017. Falling energy consumption, all-time high levels of renewable generation and record low levels of coal output all contributed to the low-carbon power sector’s increased share of the mix, which is up from 46.7% in the corresponding quarter of 2016.

Brent crude oil hits 8-month after Turkey threatens to halt Kurdish pipeline flows

Crude oil prices hit an 8-month high last month, trading above $59/bbl, after Turkey threatened to cut oil flows from Iraq’s Kurdistan region towards its ports. Turkey is trying to put more pressure on the Kurdish autonomous region over its independence referendum.

Comments from major OPEC oil producers also said the agreements to curb crude production has helped the global market on its way towards rebalancing. However, Iraqi exports increased during September and production edged higher in Libya, one of the OPEC producers exempt from a deal to curb output and support prices.

Pound jumps to highest level since Brexit vote

The Pound Sterling jumped to its highest level against the US dollar since the Brexit vote, trading around $1.36/£, after a senior Bank of England official fuelled speculation it could raise interest rates in the coming months. Gertjan Vlieghe had previously argued against a rate rise, but said the “moment is approaching” when interest rates might need to go up. Later in the month, Bank of England Governor Mark Carney also warned an interest rate rise is looming, which could come as early as November. But with Brexit uncertainty still hitting the headlines, a rise in interest rates runs the risk of curbing economic growth.

U.S. economy growth strong during Q2-2017, but hurricanes expected to slow growth

The U.S. economy expanded a bit faster than previously estimated in Q2-2017, recording its quickest rate of growth in more than two years at 3.1%, but the momentum likely slowed in Q3-2017 due to the impact of Hurricanes Harvey and Irma.

Harvey was blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. In fact, further weakness is anticipated in September because of Irma. However, rebuilding efforts are expected to boost GDP growth during Q4-2017 and in early 2018.

Anesco open’s UK’s first subsidy-free solar farm with battery storage

UK-based renewables developer Anesco has laid claim to the country’s first subsidy-free solar farm, a 10 MW site near Flitwick in Bedfordshire. Clayhill Solar Farm was developed by Anesco in just 12 weeks with work being conducted over the course of this summer and, crucially, after the Renewables Obligation scheme had closed to new applicants. The site is co-located with a 6 MW battery storage facility which the company said was crucial to being able to make the development economically feasible without subsidy support.

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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.