UK energy prices continued their downward trend with gas prices down 1.5% to 1.09p/kWh and electricity prices down 1.3% to 3.54p/kWh. Oil prices were down 5% at $34.74/barrel, coal prices were down 5% at $46/tonne and carbon permits were down 27% to €6.03/tonne.
UK energy prices drifted lower during January following bearish global developments including falling share markets, falling oil prices and a mild UK and European winter.
Share markets around the world commenced the new year close to panic, with traders, economists and analysts concerned by a slowing global economy, driven by risks involved in China transitioning to a consumption driven economy, possible interest rate rises in the US and financial risks arising from falling oil prices. China’s share market has fallen 25% this month, down a total of 48% from its June peak. US and Euro markets were also down about 7%. Stock market performances provide forward looking indications, which contrasts against this months’ US economic indicators. These held up reasonably well: including 4th quarter GDP growth of 0.7% for 2.2% growth over 2015; a decreasing CPI of 0.7% for the year; and continuing strong employment growth with 5% unemployment rate.
Oil prices continued their 11 month slide to reach a new low of $28/barrel on 20th January, the lowest price in 14 years, before bouncing back to $34 by the end of the month. This weakness is driven by a 2% oversupply of oil relative to demand and also a fall in global demand in Q4-15 compared to the previous quarter. In addition, Saudi Arabia continues their hawkish stance by maintaining maximum production levels, aggressive sales and continued investment in new capacity, in competition with Iran, their regional political rivals. Iran are trying to increase sales and production following resolution of the West’s oil embargo over Iran’s nuclear development.
A mild UK winter has resulted in low spot prices, excess supply and full storage levels, with holders of gas in storage looking for opportunities to sell into the market at reasonable prices, before the winter is over. Full storage levels have a knock on effect to the 2016 forward price curves as there will be an absence of the usual summer demand for gas to restock the stores.
Current energy prices provide good value, now at their lowest levels since 2007. Further downside risks include US slow down; Chinese hard landing if they fail to transition to consumption based economy; 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 very low prices, we believe that ultimately risks are on the upside, with the resilience of the US economy finally leading to renewed global economic growth; oil prices recovering as excess supply of 2% is soaked up by demand growth; 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 big downside and upside risks outlined in the previous section. 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 started to be passed through to bills in 2015 and CMs which will begin to be passed through 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