Price Risk Report - 1 December 2019

Last Month Summary

UK gas and power prices posted moderate losses during November. Gas prices ended the month 3.5% lower at 1.39 p/kWh strong gas pipeline imports, plentiful LNG deliveries, high gas storage and no major outages left the UK gas system largely oversupplied. Despite withdrawals from storage, gas stockpiles in the EU region are still around 93% of full capacity, meaning the region continues to be well supplied during the peak winter period from November to February.

Power also fell last month, losing 3.9% to 4.70 p/kWh in response to weaker gas, coal, carbon and European energy prices.

Brent crude oil prices rose 7.1% to $63.87/bbl, as OPEC and Russia geared up to discuss deeper production cuts. Carbon lost 2.3% higher to €25.01/tCO2 as markets cautiously awaited the outcoming of December’s general election, with the outcome likely to determine whether the UK is able to pass a Brexit deal through Parliament before the end of January.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø European storage remains high around 93% of total capacity, meaning that there is a significant quantity of surplus gas on the market.

Ø An increase in global LNG operations means that markets have experienced a notable boost in LNG deliveries into UK terminals over the last 2 months.

Ø A decisive outcome to the UK’s General Election on 12th December could see positive movement in the Pound, reducing the cost of energy imports.

  Ø If Britain fails to vote either the Conservative or Labour parts into a majority at December’s General Election Brexit uncertainty could continue, dampening the value of the Pound, making gas and power imports more expensive.

Ø Confirmation by South Korea that 25% of its coal power stations will shut down following environmental campaigns could result in an increase in demand for LNG, boosting gas prices in Europe

Ø Deeper cuts to crude oil production from OPEC and Russia could boost oil prices, with the next OPEC meeting taking place on 5th December.

Recommendations: November has broadly seen prices slide as high gas storage levels, plentiful LNG arrivals and optimism over the UK Government’s ability to pass a Brexit deal have all helped to ease prices. However, colder temperatures are on their way and rising LNG prices could see gas prices edge higher over the next couple of months.

Energy users with contracts renewing 1 October 2020 onwards may see wish to lock in their contracts before the end of Q2-2020. However, the volatile nature of the energy markets and Britain’s General Election uncertainty means price movement could be unpredictable over the next month.

Beond Rolling Annual Indices since Jan-07

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

UK Government bans gas fracking in the UK after concern about earthquakes

The UK fracking industry suffered a fatal blow as the Conservative government ended its support for the controversial practice. The move, just weeks ahead of a general election, effectively bans new wells using hydraulic fracturing technology. The move underscores the unpopularity of the technique, which involves injecting water and sand into well-bores under high pressure. It also indicates a growing consensus between the main political parties about the need to zero out fossil fuel emissions by the middle of the century to rein in climate change.

Oil higher as Russia and OPEC to discuss plans to deepen production cuts

Brent crude oil prices rose 7.1% higher to $63.87/bbl, as Russia said it would continue its cooperation with OPEC to keep the global demand balanced. OPEC members are next scheduled to meet on 5th December in Vienna, followed bytalks with a group of other exporters, including Russia, known as OPEC+.

At the same meeting late last year, OPEC decided to support prices by cutting output by 1.2 million bpd. However, this time OPEC and Russia could discuss the possibility of deepening cuts.

Pound steady in build up to UK General Election on 12th December

The Pound Sterling was broadly steady last month as Britain entered a new period of political uncertainty during the build up to the UK’s General Election on 12th December 2019. While both major parties could theoretically win, the most likely outcome is still expected to be that neither Boris Johnson’s Conservative party nor Jeremy Corbyn’s Labour party will secure the necessary majority needed to put the Brexit situation to bed.

China hints at progress towards trade deal with United States

China hinted at progress towards a trade deal with the United States, raising hopes for an end to a long dispute that has weighed on economic growth and demand for fuel. The trade dispute had previously prompted lower forecasts for oil demand and raised concerns that a supply glut could redevelop in 2020. However, gains were limited following comments from U.S. President Donald Trump saying that the U.S. had not agreed to roll back tariffs on China.

Businesses to complete ESOS Phase 2 compliance as imminent 5th Dec 2019 deadline looms

The Energy Savings Opportunity Scheme (ESOS) Phase 2 deadline is fast approaching, and qualifying businesses are being advised to make sure that they have completed their compliance. No matter which route an organisation chooses to meet its compliance obligations, it must notify the Environment Agency of its compliance by completing an online questionnaire. The deadline to complete this is less than 3 weeks away on 5th December 2019. The regulator may issue civil sanctions including financial penalties if an organisation does not meet the scheme’s obligations.

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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.