UK energy prices continued to trend lower with gas prices down 1.5% to 1.27p/kWh and electricity prices down 2.4% to 3.89p/kWh. Oil prices were down 10% at $44.61/barrel, coal prices were up 2.3% at $54/tonne and carbon permits were up 1% to €8.58/tonne.
UK energy prices continued their slide this month in light of weak outlook for global economy and excess supply in oil markets. Commencement of Paris global climate change conference could result in energy price surprises.
Monetary policy has traditionally been a powerful driver of asset prices, commodity prices (including energy) and economic development. Next week European Central Bank boss, Mr Draghi, may announce further monetary policy easing. Markets are pricing this possibility into bonds and exchange rates, but uncertainty remains as the ECB may decide that the European economy is slowly turning around without the extra stimulus.
At the same time in the US, markets are currently pricing in a 70% probability of Janet Yellen at the US Fed commencing their cycle of monetary tightening in December. Previous decisions have been postponed due to market panics in China and emerging markets. The Chinese stock markets dropped 40% earlier in the year, until authorities stabilised by purchasing an estimated 6% of the market, but the market fell another 4.4% during Friday before concerted buying saw the market closing slightly higher.
Yesterday was the start of the Paris COP21 global climate change conference over two weeks. All nations of the world are taking part along with major corporations including many oil providers. There is still hope for a global deal, although a binding ‘treaty’ has been ruled out by US. There are low expectations for energy price sensitive climate deals, but the conference could announce initiatives such as carbon emission markets with price increases or new subsidies supporting carbon reducing technologies.
Oil prices continue to slide over risks of slowing demand increases driven by weak global economic growth outlook. This is despite tough words from Saudi Arabia leaders ahead of Fridays OPEC meetings, which markets believe will be ineffective at agreeing and executing supply cuts. It is also despite rising instability and risks in the Middle East as the tempo increases around Syrian conflict following the shooting down of a Russian fighter jet by Turkey air force.
We believe that current energy prices provide good value, now at their lowest levels since 2010. Further downside risks include US interest rate rises, China economic problems driving global deflationary recession, oil prices continuing their downward trend and the LNG supply glut forming in Asia-Pacific next year.
Despite these downside risks, which may be factored into the current price, we believe that the long-term risks are on the upside, with the resilience of the US economy ultimately leading to renewed global economic growth; oil prices recovering as demand soaks up excess supply and suppliers struggle with losses at current prices; as new shale oil supplies from US reach their peak; as rising global demand soak up excess LNG gas supplies coming to market; and with very tight electricity supplies in UK over the next couple of winters.
Energy buyers preferring fixed price contracts should lock out prices for up to 3 years in order to take advantage of current low energy prices and avoid risk of increasing oil prices. However, we would recommend implementing a hedging strategy to avoid uncertainty and price volatility, given the emerging LNG gas glut and risk of slower economic growth. This would involve purchasing a flexible purchase contract and locking away prices in layered tranches.
When tendering your supply contracts, environmental taxes and subsidies need to be carefully negotiated to ensure that any fixed and pass-through components are fully understood and benchmarked correctly across different energy suppliers’ offers. Also ask about subsidy pass-through costs from Electricity Market Reform in particular CFD costs which will start to pass through to bills in 2015 and CMs in 2016.
Beond risk service and online risk tools include a broad range of innovative hedging strategies which can deliver considerable cost savings at no additional risk, by harnessing market uncertainty and price volatility. Also our tender service uses an online reverse auction which creates an intensely competitive environment to produce best prices and full transparency.
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
Derek Myers, Director, Beond, 07970 655249