Price Risk Report - 1 August 2019

Last Month Summary

UK gas and power prices rose overall during August. Gas prices ended the month 5.7% higher at 1.59 p/kWh as a number of Norwegian Gas pipeline outages went offline for unplanned maintenance, significantly reducing gas imports to the UK for most of the month.

At the same time, the recent heatwave in NW Europe has caused several French and German nuclear units to curtail power output, as higher water temperatures and slow water flow rates limited the ability for power plants to use river water to cool nuclear reactors. EDF’s use of water from rivers as a coolant is regulated by law to protect plant and animal life and it is obliged to cut output in hot weather when water temperatures rise, or when river levels and flow rates are low. As a result, wholesale UK power prices edged higher, gaining 3.9% to 5.23 p/kWh.

Brent crude oil prices rose 0.5% to $65.05/bbl, after Iran seized a British-flagged tanker in the Gulf, Britain has started sending a warship to accompany all British-flagged vessels through the Strait of Hormuz. Carbon has also been a big bullish driver for UK and European power prices, trading above €28.76/tCO2 after Germany signalled it will protect the region’s emissions market by cancelling allowances to prevent a surplus accumulating as it closes coal power plants.

Energy Price Outlook

Bearish price drivers
Bullish price drivers
Ø If European storage continues to fill at the current rate, we could find ourselves in a situation with a huge quantity of surplus gas on the market.

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 Brexit uncertainty is expected to continue to dampen the value of the Pound, making gas and power imports more expensive.

Ø The end of coal-fired power production at EDF’s 2,000MW Cottam plant in September 2019 and SSE’s Fiddler’s Ferry station by March 2020 could add to Britain’s supply risk heading into Winter 2019/20.

Ø Despite recent Brexit-related volatility, the Market Stability Reserve is expected to gradually drive the price of carbon allowances higher, threatening €30/tCO2, in the near future.

 

Recommendations: Following the recent heatwave, temperatures are now trending lower, and when combined with Europe’s gas and power outages could begin to drive energy prices higher over the coming months. The closer we get to the start of winter, the bigger the impact unplanned gas and power outages will have on the market.

As a result, energy users renewing later in 2019 or early 2020 should lock in any open contracts as a priority before the end of August.

Beond Rolling Annual Indices since Jan-07

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

Gas pipeline between the Netherlands and UK announces reverse flows now available

On 17 July, the operator of the Dutch-UK Balgzand-Bacton link (BBL) gas interconnector announced that transportation capacity for physical reverse flows is now available. This marks the first time that bi-directional gas flows on the pipeline will be available. The reverse flow plans will allow for 16 mcm/d of exports from UK to the Netherlands, whilst the capacity from the Netherlands to the UK is 45 mcm/d. So far this year, the UK has imported 1,272 mcm, averaging 6.5mcm/d. This is much lower than the same period in 2018, in which gas imports totalled 2,061 mcm, averaging 10.5mcm/d.

The decision to implement reverse flows on the BBL was due to a lack of use of the pipeline during summer months – a period in which the UK is traditionally long on gas due to lower demand – and allows the UK to export additional gas capacity to the continent.

Oil trading around $65/bbl supported by rising tensions with Iran

Brent crude oil prices rose 0.5% to $65.05/bbl, supported by rising tensions between the West and Iran. A week after Iran seized a British-flagged tanker in the Gulf, Britain has started sending a warship to accompany all British-flagged vessels through the Strait of Hormuz, a change in policy after the government previously said it did not have resources to do so. Saudi Arabia, the world’s top oil exporter, also urged global oil buyers to secure energy shipments passing along the Strait of Hormuz, through which about 20% of global supply is transported daily.

Boris Johnson determined UK will leave EU on 31 October after becoming Prime Minister

Newly-appointed UK prime Minister Boris Johnson reportedly had a reportedly tense conversation with German Chancellor Angela Merkel on Friday, reiterating his wishes that the Irish backstop be scrapped. The EU’s chief negotiator Michelle Barnier said on Thursday the terms on which Mr Johnson wants to negotiate a new agreement were unacceptable. Prior to his appointed, PM Johnson said the UK must leave the EU by the deadline of 31st October “do or die, come what may”.

European Central Bank prepares for second wave of quantitative easing

The European Central Bank is ready to cut interest rates and embark on a fresh round of bond purchases this autumn, a move that that ECB hopes will fend off fears of economic uncertainty and a global economic slowdown. The bank’s president, Mario Draghi, made clear that all measures available to the ECB will be used as the export-driven European economy is experiencing a severe slowdown due to the German economy posting dismal figures in recent months, a brewing conflict between Brussels and Italy over the latter’s budgetary policy, and the threat of a disorderly Brexit.

UK government proposes to spread Shetland electricity costs from April 2020

Households in the northern parts of Scotland could soon save money on their electricity bills thanks to UK government plans to more fairly distribute the costs for providing electricity to the Shetland Islands. The isolated nature of Shetland’s electricity system means that next year it will cost £27 million more a year to keep its residents’ homes and businesses powered, than it does to provide power on the mainland. The cost is currently picked up by consumers in the north of Scotland through their electricity bills. However, going forward the additional cost would more likely be added to the existing Assistance for Areas with High Electricity Distribution Costs (AAHEDC) network charge.

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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.