Price Risk Report - 1 January 2020

Last Month Summary

UK gas and power prices posted strong losses during December. Gas prices ended the month 18.3% lower at 1.14 p/kWh as 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 86% 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 10.3% to 4.23 p/kWh in response to weaker gas, coal and European energy prices.

Brent crude oil prices rose 9.1% to $66.00/bbl, as OPEC and its close allies have agreed to deepen recurring production cuts by an additional 500,000 bpd through to March 2020. Carbon lost 2.8% to €24.64/tCO2 as markets cautiously awaited progress on Boris Johnson’s plan for Britain to leave the EU by 31st Jan 2020. It is expected the UK will remain part of the EU ETS carbon trading scheme for at least one year, although nothing in politics is final until a deal has been completed.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø European storage remains high around 86% 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 will continue to experience a notable boost in LNG deliveries into UK terminals over the coming months.

Ø If Boris Johnson completes his mission for Britain to exit the EU on 31st Jan 2020, the improved certainty may provide some positive movement in the Pound, reducing the cost of energy imports.

Ø Colder temperatures in January and February could see prices gain in the short term.

Ø If the UK ratifies a Brexit deal by 31 January, UK emitters will remain in the EU ETS until at least the end of 2020. This scenario now appears to be likely, after the Conservative party won a comfortable majority of seats in last month’s general election.

Ø Escalating Middle Eastern tensions and deeper cuts to crude oil production from OPEC and Russia could boost oil prices over the coming months.

Recommendations: December has broadly seen prices slide as high gas storage levels, plentiful LNG arrivals and Boris Johnson’s comfortable election victory have all helped to ease prices. However, colder temperatures are on their way during late-January and February, resulting in volatile gas prices during Q1-2020. And escalating Middle Eastern tensions could boost prices in the short term.

The volatile nature of the energy markets means price movement could be unpredictable for the rest of winter, especially as temperatures drop.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 January 2020
Source: Beond Analysis, Reuters

Historic moment as zero-carbon electricity outstrips fossil fuels in Britain across 2019

Zero-carbon energy became Britain’s largest electricity source in 2019, delivering nearly half the country’s electrical power and for the first time outstripping generation by fossil fuels. Following a dramatic decline in coal-fired power and a rise in renewable and low-carbon energy, 2019 was the cleanest year for electrical energy on record for Britain, according to National Grid.

Official data shows wind farms, solar, nuclear energy and subsea cable imports delivered 48.5% of Britain’s electricity in 2019. This compares to 43% generated by fossil fuels – coal, gas, and other carbon sources such as oil and diesel. The remaining 8.5% was generated by biomass, such as wood pellets.

Oil gains 9.1% as OPEC+ agrees to deepen oil production cuts by a further 500,000 bpd

Brent crude oil prices rose 9.1% higher to $66.00/bbl, as OPEC and its close allies have agreed to deepen recurring production cuts by an additional 500,000 bpd through to March 2020. The new deal, which is much larger than many analysts had expected, will see OPEC+ reduce total oil output by 1.7 million. OPEC’s de facto leader, Saudi Arabia has been adamant those that have previously been overproducing – such as Iraq and Nigeria – must comply with the group’s quota.

Pound stronger as Boris Johnson’s UK Election win improves certainty for Brexit future

The value of the pound jumped after the Conservative Party won a majority in the UK general election. The bounce is down to the fact a large Conservative majority means Boris Johnson could get his Brexit deal through Parliament more easily, a longstanding uncertainty that has plagued Britain’s politics since 2016’s referendum. Parliament now has until 31st January 2020 to debate and pass the Brexit exit bill. There will then be a transition period until the end of the year to agree a trade deal with the European Union.

Middle East in crisis as U.S. and Iran relations escalating

Iran has carried out a ballistic missile attack on air bases housing US forces in Iraq, in retaliation for the US killing of General Qasem Soleimani. Matters worsened after Iran’s armed forces said a Ukrainian airliner was shot down in error, killing 176 people) in an admission that sparked an angry demonstration.

Suppliers forced to pick up cost of £58.8m shortfall in Renewables Obligation payments

Power companies that have paid their green energy payments on time have been left to pick up the tab by others that have failed to honour their commitments. Suppliers that have paid part or all of what they owe to the Government’s green scheme will be tapped for a further £58.8m, according to the latest data from energy watchdog Ofgem.

A recent spate of insolvencies in the energy market have been blamed in part on the requirement for companies to pay into the renewables scheme. A total of 16 firms have gone bust, or had licenses revoked, owing most of the remainder. Ofgem said it hoped to recover some of the money from the firms’ administrators, although energy consumers may have to foot a large portion of the bill.

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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.