Price Risk Report - 1 July 2019

Last Month Summary

UK gas prices fell overall during June. Gas prices ended the month 1.8% lower at 1.51 p/kWh as milder temperatures across both the UK and Western Europe, and plentiful gas storage in Europe has left the UK well supplied. European gas storage levels are nearly 71% full. Europe’s total gas storage capacity is around 98 bcm, but the current rate of injections means that Europe is on schedule to have a massive 13 bcm of surplus gas that can’t be placed in storage ahead of the winter gas season.

Meanwhile, Russia’s Nord Stream 2 project has withdrawn its application to construct part of its route through Denmark’s territorial waters, aiming to select an alternative route.

However, a marked increase in European power, oil and carbon saw wholesale UK power prices edge marginally higher, gaining 0.1% to 5.03 p/kWh.

Brent crude oil prices rose 4.4% to $64.74/bbl, buoyed by U.S. government data that showed a larger-than-expected drawdown in crude stocks as exports hit a record high, and surprise drops in refined product stockpiles. The EIA said crude inventories fell 12.8 million barrels last week – the most since September 2016 – far surpassing expectations for a decrease of 2.5 million barrels.

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 There are currently no major concerns over power generation outages in Northwest Europe to impact capacity next Winter.

  Ø Rising crude oil prices could be a key driver for forward gas and power prices, driven primarily by OPEC decision to extend production cuts at least until the end of 2019.

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, potentially threatening €30/tCO2,.

 

Recommendations: Temperatures are trending upwards, and when combined with Europe’s plentiful gas storage situation, supply risks ahead of Winter 2019/20 are notably reduced compared to last year. However, 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 consider locking in any open contracts before the end of July. The possibility of major gas or power outages driving up prices this close to Winter 2019/20 means the risks of waiting outweigh the potential benefits.

Beond Rolling Annual Indices since Jan-07

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

UK becomes first major economy to pass net zero emissions law

The UK today became the first major economy in the world to pass laws to end its contribution to global warming by 2050. The target will require the UK to bring all greenhouse gas emissions to net zero by 2050, compared with the previous target of at least 80% reduction from 1990 levels. The UK has already reduced emissions by 42% while growing the economy by 72% and has put clean growth at the heart of our modern Industrial Strategy.

The UK’s 2050 net zero target — one of the most ambitious in the world — was recommended by the Committee on Climate Change, the UK’s independent climate advisory body. Net zero means any emissions would be balanced by schemes to offset an equivalent amount of greenhouse gases from the atmosphere, such as planting trees or using technology like carbon capture and storage.

Oil above $64/bbl on higher than expected U.S. crude withdrawals

Brent crude oil prices rose 4.4% to $64.74/bbl, buoyed by U.S. government data that showed a larger-than-expected drawdown in crude stocks as exports hit a record high, and surprise drops in refined product stockpiles. The EIA said crude inventories fell 12.8 million barrels last week – the most since September 2016 – far surpassing expectations for a decrease of 2.5 million barrels.

Uncertainty remains over Brexit as Conservative party leadership contest continues

Currency and financial investors remain anxious about the possibility of a no-deal Brexit should Boris Johnson win the Conservative party leadership race and replace Prime Minister Theresa May as prime minister. Investors have been reluctant to take big positions in the pound amid the Conservative party leadership contest, with the result set to be announced on 22 July. Johnson, the frontrunner, has said Britain will leave the European Union on 31st Oct 2019 deal or no-deal, but he has also said there is only a one in a million chance of leaving without an agreement in place.

European leaders say U.S.-China trade dispute contributing to global economic slowdown

Speaking in the Japanese city of Osaka, where representatives of the world’s top economies are gathering for the two-day G20 summit, Jean-Claude Juncker said: “The trade relations between China and the US are difficult, they are contributing to the slowdown of the global economy.

U.S. President Donald Trump is due to meet Chinese President Xi Jinping on Saturday as the summit concludes and there are hopes this meeting could bring an end to the dispute. But it could instead see Mr Trump slap further tariffs on Chinese products as part of his “America first” stance.

T-1 Capacity Market auction for Winter 2019/20 clears at just £0.77/kW

The T-1 capacity auction for delivery this winter has cleared at a record low price of £0.77/kW. Some 129 units have been awarded an agreement, totalling 3.6GW of capacity. Four years ago, the auction paid a much higher price, £18/kW, for 46GW of capacity for this same winter.

The auction results do not make great reading for demand-side response (DSR), with swathes of units from E.ON, EDF, Enel X, Flexitricity, Grid Beyond, Kiwi Power, Scottish Power, Smartest Energy and UK Power Reserve dropping out as the price plummeted.

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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.