Price Risk Report - 1 November 2019

Last Month Summary

UK gas and power prices posted losses during October. Gas prices ended the month 10.9% lower at 1.44 p/kWh as high gas storage and comfortable imports left the UK gas system largely oversupplied. Gas storage in the EU region hit around 97% of full capacity, meaning the region was comfortably supplied ahead of the peak winter period from November to February.

Power also fell last month, losing 4.5% to 4.89 p/kWh in response to weaker gas and coal prices. However,

Brent crude oil prices rose 0.6% to $59.62/bbl, reflecting talks of deeper OPEC production cuts and accusations of retaliatory attacks from Saudi Arabia against Iranian oil tankers. Carbon gained 3.6% higher to €25.61/tCO2 as the increased chance of a UK securing a deal with the EU boosts the likelihood that Britain will remain in the EU ETS for at least the next two years.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø European storage remains high around 96% of total capacity, meaning that further gas imports are creating a huge quantity of surplus gas on the market.

Ø An increase in global LNG operations means that markets have already noted a significant increase in LNG deliveries into UK terminals in recent weeks.

Ø A lot of currency movement during November could depend on political campaigns from both sides ahead of the UK’s 12 December 2019 General Election.

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

Ø Risks of major coal shutdowns across South Korea 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, although the next OPEC meeting doesn’t take place until early December.

Recommendations: In just the last few weeks prices have continued to 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 fairly unpredictable over the next month.

Beond Rolling Annual Indices since Jan-07

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

Ukraine and Russia brace for negotiations as gas transport contract expires in Jan 2020

The ongoing Ukrainian-Russian geopolitical tussle once again enters the realm of energy as trilateral gas-transit talks are set to resume in Brussels on 28 October between the EU, Moscow and Kiev. Ukraine and Russia have been negotiating over the duration of a new contract, transit volumes, and tariffs. At stake is about $3 billion in annual gas transit fees that Ukraine usually receives from Russia for transmitting gas to EU countries. However, these flows could diminish as Moscow pursues the Nord Stream 2 project to build a pipeline under the Baltic Sea, bypassing Ukraine, that could go online as soon as spring 2020. Kiev entered the talks supporting the EU’s proposal to receive at least 60 billion bcm of flows a year, or about 75% of what Russia sent through Ukraine last year.

Oil ends month higher following talks of deeper OPEC production cuts

Brent crude oil prices edged just 0.6% higher to $59.62/bbl, as OPEC and Russia consider deeper production cuts. OPEC leader Saudi Arabia also wants to improve compliance with the cuts, as Iraq and Nigeria are among the countries that haven’t fully complied with the reductions, running until March 2020.

Middle Eastern tension were also raised after reports that a missile had hit an Iranian oil tanker. Iran said that the missile had travelled from Saudi Arabia’s direction.

Pound higher chance of no-deal Brexit now deemed highly unlikely

Despite reservations from France, EU member states have agreed to extend the Brexit deadline until 31 January 2020. However, an earlier departure is possible if UK politicians can approve a deal. Despite delays, a hard Brexit is now considered highly unlikely. But of course, if we look at the medium term, there is still plenty of scope for volatility and risk.

As the Boris Johnson’s government struggled to approve the Prime Minister’s Brexit deal, MPs finally backed calls for a General Election, with the British people set to go to the polls on 12 December with many hoping this will break the Brexit deadlock.

U.S. trade war with China takes its toll on eurozone economy

Fresh evidence of the impact of global trade wars on the eurozone has emerged with official figures revealing growth in the 19-nation single currency bloc was just 0.2% in the three months to September. Eurozone growth was slightly stronger than financial markets had been expecting, suggesting Germany, Europe’s biggest economy, narrowly avoided slipping into recession in the third quarter.

UK Capacity Market secures EU approval following probe into State Aid

The European Commission has approved the British Capacity Market scheme following an EU State Aid probe into certain elements of the scheme, such as information on energy consumers willing to reduce their consumption when needed. The Commission said it found no evidence that capacity providers or the consumers ready to reduce consumption were at a disadvantage and found the scheme was in line with European Union state aid rules. Payments to generators have been delayed, but Britain’s government said it would be able to reinstate the mechanism to make payments to capacity providers, including the almost 1 billion pounds deferred during the suspension.

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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.