Price Risk Report - 1 September 2019

Last Month Summary

UK gas and power prices fell overall during August. Gas prices ended the month 4.7% lower at 1.52 p/kWh as a ramp up in gas pipeline flows from Norway and LNG cargo deliveries from Qatar left the UK gas system consistently over 20 mcm/d oversupplied.

Ongoing injections into gas storage means that stockpiles across the EU region has now reached 91% of capacity. Last year, gas stockpiles didn’t reach this level until late-October. At the same time, mild temperatures across the UK and Europe has limited gas or power demand to be used in heating. As a result, wholesale UK power prices edged lower, falling 5.1% to 4.96 p/kWh.

Brent crude oil prices fell 8.9% to $59.25/bbl, reflecting ongoing fears that global oil demand will shrink as a result of Washington’s escalating trade war with Beijing. Carbon has also been a bearish driver for UK and European power prices, falling to around €25/tCO2 as 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 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 overall 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 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 Despite recent Brexit-related volatility, the Market Stability Reserve is expected to gradually drive the price of carbon allowances higher, threatening €30/tCO2, in the near future.

 

Recommendations: Prices are now hovering around their lowest point in 18 months. While there may be a very small amount of room for prices to edge lower in the next week or two, the potential savings are relatively small when you consider the chance of unplanned outages driving prices for Winter 2019/20 higher before the season’s delivery on 1 October 2019.

As a result, energy users renewing later in 2019 or early 2020 should act immediately to lock in any open contracts as an urgent priority.

Beond Rolling Annual Indices since Jan-07

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

HunterstonB4 nuclear reactor to restart after nuclear regulator declared safe

Britain’s nuclear watchdog, the Office for Nuclear Regulation, has agreed to allow EDF Energy’s Hunterston B4nuclear reactors to restart, one year after it was shut down to investigate cracks in its graphite core. The regulator will allow the reactor to run for four months after proving that the reactor cores can still fulfil their fundamental safety requirements, despite the cracks in its graphite bricks.

The reactor was shut down last March after investigators discovered cracks in the graphite core of reactor 4 and 3 at the Scottish nuclear plant. Its application to restart reactor 3, which was found to have more than 350 hairline cracks in its graphite core, is still pending. EDF Energy had expected to restart the reactors in November but was forced to delay until the end of April this year. The energy company hopes to be powering homes by the end of August. EDF Energy hopes to run the Hunterston nuclear plant until 2023.

Oil falls to a 7-month low on rising oil production and lower global demand forecasts

Brent crude oil prices tumbled 8.9% to $59.25/bbl, reflecting ongoing fears that global oil demand will shrink as a result of Washington’s escalating trade war with Beijing.

However, tensions in the Middle East remained high after Iran seized a number of tankers in recent weeks in the Strait of Hormuz, a major chokepoint for oil shipments. Saudi Energy Minister Khalid al-Falih and U.S. Energy Secretary Rick Perry on Tuesday expressed mutual concern over threats targeting freedom of maritime traffic in the Gulf.

United States continues to escalate trade war with China, imposing new tariffs

The U.S. has imposed fresh tariffs on $112bn of Chinese imports. The move is the first phase of US President Donald Trump’s latest plan to place 15% duties on $300bn of Chinese imports by the end of the year. In response, Beijing began to introduce measures targeting $75bn worth of US goods. The measures included a 5% tariff on US crude oil, the first time fuel has been hit in the trade battle between the world’s two largest economies.

UK political turmoil after Queen approves Prime Minister’s request to suspend Parliament

The Pound Sterling fell in value versus both the US dollar and euro on ongoing Brexit uncertainty after the Queen approved an order from Prime Minister Boris Johnson for Parliament to be suspended from the second week in September until 14th October – just 17 days before the scheduled date of Brexit. Conservative whips have told rebel Tory MPs that they will be deselected if they vote to block a no-deal Brexit. On Tuesday, opposition parties are expected to launch an attempt to pass legislation which would effectively prevent the Prime Minister taking the UK out of the EU without a deal.

SSE secures CM contracts from RWE after decision to close Aberthaw B coal plant

SSE has agreed for the transfer of capacity market contracts for the years 2019/20 and 2020/21 from RWE’s Aberthaw B coal-fired power station to its gas plant in Scotland, following RWE’s announcement to close its 1.56GW coal plant in Wales next March amid “challenging” market conditions. SSE’s Peterhead plant already holds capacity contracts for the years 2018/19 and 2021/22.

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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.