Price Risk Report - 1 October 2019

Last Month Summary

UK gas and power prices rose overall during September. Gas prices ended the month 6.3% higher at 1.61 p/kWh as major summer maintenance at several Norwegian gas fields and terminals saw pipeline imports into Britain fall close to zero. While various other unplanned outages created uncertainty over UK’s gas supply ahead of the winter season.

However, power was the big driver this month, after EDF revealed it had discovered problems with the integrity of some of the welding components found in its nuclear reactors. While the risk of significant outages seems to have since subsided, Northwest Europe has been burnt in recent years with major outages across EDF’s nuclear fleet in the UK and France. In response to the nuclear power uncertainty, prices were extremely volatile. As a result, wholesale UK power prices rose 3.0% to 5.11 p/kWh.

Brent crude oil prices rose 1.2% to $59.25/bbl, after drone strikes on Saudi Arabia’s oil infrastructure cut global crude production by 5%. Carbon edged 0.1% lower to €24.72/tCO2 reflecting ongoing concerns that a no-deal Brexit would see the UK exit the EU ETS at short notice, flooding carbon allowances onto the market.

Energy Price Outlook

Bearish price drivers Bullish price drivers
Ø European storage has already reached 97% capacity, meaning that further gas imports are already creating a huge quantity of surplus gas on the market.

Ø Lower overall gas demand from Asia means LNG has been freed up to supply gas networks in the UK and Continental Europe. Markets have already noted a significant increase in LNG deliveries into UK terminals in recent weeks.

Ø If Britain exits the EU ETS at short notice, the oversupply of EUA carbon permits is likely to drive power 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 German government is reviewing new plans to phase out coal-fired power production by 2030, eight years early than initially planned.

 

Recommendations: In just the last few weeks extended Norwegian gas outages, concerns over major nuclear outages across the UK and France, and drone strikes against Saudi Arabia have all created huge volatility in UK gas and power prices. With colder temperatures on the way it is highly recommend that any contracts up for renewal in the next 6-8 months are renewed ASAP in order to protect budgets for energy users.

Energy users with contracts renewing 1 October 2020 onwards may wish to wait until next year. However, the volatile nature of the energy markets means all renewals should be locked in before the end of June.

Beond Rolling Annual Indices since Jan-07

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

Netherlands to halt core Groningen gas production by 2022, eight years earlier than planned

The Netherlands will halt production at Groningen, Europe’s largest onshore natural gas field, by 2022, eight years earlier than initially planned, the Dutch government said onTuesday. Groningen produced nearly 54 billion cubic meters (bcm) of gas in 2013 before tremors blamed on drilling damaged buildings and prompted a series of lowered caps on output and protests by residents and campaigners. An unusually strong earthquake in January 2018 prompted the government last year to promise to end production by 2030. However, Economy Minister Eric Wiebes last month signaled the end could come a lot sooner, with production falling to zero by mid-2022.

Oil ends month higher after drone strike in Saudi Arabia hits production

Brent crude oil prices spiked at $71/bbl, after drones strikes on a Saudi Arabian oil facility removed 5% of global crude oil output, before tensions in the Middle East calmed and prices ended the month just 1.2% higher at $59.25/bbl. Despite the attacked taking 5.7 million bpd of the Saudi Arabia’s daily crude production offline, output largely returned to normal within two weeks. The US blamed the attacks on Iran, but there seems little chance these accusations will result in any action.

Pound higher as Parliament returns, reducing chance of no-deal Brexit

The Pound edged up against the US dollar after the UK Supreme Court ruled Prime Minister Boris Johnson’s decision to prorogue Parliament was unlawful. The court stated it was wrong for the Prime Minister to prevent MPs from carrying out duties in the run-up to the 31 October Brexit deadline.

However, this ruling does create further uncertainty with it no clearer whether the UK will leave with a deal, without a deal or not at all. The Pound Sterling has been primarily driven by political sentiment in recent times, and despite the bucket loads of political intrigue emanating from Westminster, very little has in fact changed for the currency markets. If anything, the same familiar risks and uncertainties linger.

Eurozone economy slows amid trade decline and Brexit fears

The eurozone economy came close to stalling in September after declines in global trade and the threat of a no-deal Brexit triggered the fastest fall in manufacturing output in nearly seven years. Germany was the main driver of the slump after a survey of private sector activity found that the growing threat to international trade from the tit-for-tat US-China trade war had left it in the worst position since 2009. Often referred to as the powerhouse of the 19-member currency bloc’s economy, Germany has suffered a year-long slowdown that has accelerated in recent months.

Ørsted exits SME and mid-market energy sector to concentrate on 30GWh+ I&C customers

Ørsted has announced that it is to exit the SME and mid-market energy retail sector to concentrate on Industrial and Commercial customers that use at least 30 GWh of power per year and on the global expansion of its renewable generation assets. It will continue to serve existing mid-market customers but will not renew contracts when they expire. The company will still sell through brokers and third-party intermediaries but aims to offload more of its offshore wind power through corporate Power Purchase Agreements (PPA), as well as green gas.

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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.