UK energy prices were broadly bullish during August, as faltering production from both the UK Continental Shelf and Norway, as well as higher demand, led to supply shortfalls. Norway in particular was hit by a number of unplanned gas field and terminal outages, while scheduled annual maintenance is also expected to cut Norwegian flows by around halve between 2-25 September.
The number of LNG cargoes arriving in Britain dropped off during August putting pressure on medium range storage, which is currently filled to 77% of capacity. As a result, gas prices rose 5.2% to 1.53 p/kWh. The UK electricity market tracked gas, coal and European energy prices higher. Overall, forward electricity prices lifted 4.4% to 4.57 p/kWh.
Oil prices were bearish last month, slipping 0.5% to $52.38/bbl, as Storm Harvey hit the USA, hampering demand by crude oil’s biggest customers: refineries and American drivers. Crude prices also declined as a result of a slowing down of Chinese refining activity, raising doubts over the outlook of its future crude demand alongside increasing shale output in the USA.
Coal prices jumped 2.6% to $77.45/tonne, while European carbon permits surged 14% to €5.94/tonne.
|Bearish price drivers||Bullish price drivers|
|Ø Rough’s gas storage closure means that the facility will not need to be refilled during any future Summer seasons, reducing overall gas demand during these warmer periods.
Ø Further deliveries of U.S. LNG to British terminals would provide improve the UK’s security of supply.
|Ø Rough’s closure 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 Production outages at Norwegian gas fields and terminals threaten to reduce gas pipeline flows to the UK gas network, putting added pressure on alternative supplies.
What to watch out for: With the closure of Britain’s Rough gas storage facility, UK buyers are expected to rely more heavily on foreign gas imports, particularly LNG, to meet peak winter demand. However, with significant Norwegian gas maintenance throughout September and a lack of scheduled LNG deliveries, prices could rise quickly once colder weather forecasts hit the headlines.
Recommendations: The opportunity for customers to benefit from lower prices is fairly limited, while the cost of higher prices would be far more severe. Customers with contracts renewing during winter should ensure to lock out all their remaining volume ASAP, and certainly before the end of September.
Soaring generation from the UK’s distributed solar assets sent UK power demand to a new low last month, according to data compiled by monitoring firm EnAppSys. Average half-hourly demand throughout July stood at just 26.2GW, courtesy of a significant amount of embedded generation from sources such as rooftop solar.
Solar generation is in turn impacting on thermal unit such as coal. Throughout July, coal-fired power production dropped to a 135-year low, contributing only 2% to the total energy mix. During the same period last year, coal made up 4% of all generation and in July 2015, its share was as high as 22%.
Oil prices fell as flooding and damage from Tropical Storm Harvey shut nearly a quarter of U.S. refinery capacity, curbing demand for crude while raising the risk of fuel shortages. Refineries with output of 4.2 million bpd were offline on Tuesday, representing 23% of U.S. production.
It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown. While no two natural disasters are similar, the precedent of Hurricane’s Rita and Katrina would suggest that 10% percent of the currently offline capacity could remain unavailable for several months.
The pound fell against the dollar and the euro after UK inflation came in below expectations at 2.6%, lowering the likelihood of an imminent interest rate hike from the Bank of England. Sterling slumped 2.7% to €1.09 against the euro – its lowest level in almost eight years.
The last time a pound bought so few euros, in October 2009, the UK economy had recently emerged from one of the deepest recessions its history. Global financial firm, Morgan Stanley, have predicted that the currency could fall below parity for the first time ever by early 2018.
The United States economy grew faster than initially thought during Q2-2017, notching its quickest pace in more than two years, and there are signs that the momentum was sustained at the start of the third quarter.
GDP increased at a 3% annual rate in the April-June period, hitting President Trump’s goal for the first time since he took office. Higher consumer spending was behind the solid growth rate.
National Grid has set the changes to gas transmission charges that will come into force on 1 October. The National Transmission System (NTS) is Britain’s high-pressure gas network which transports gas from the entry terminals to gas distribution networks, or directly to power stations and other large industrial users.
The notice of revised charges took into account updated demand forecasts for gas for use in power generation, as well as reductions in capacity bookings in the July 2017 application window. Increases in costs are ultimately passed to end users.
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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.