UK energy prices increased this month with gas prices up 8.0% to 1.13p/kWh and electricity prices up 5.3% to 3.64p/kWh. Oil prices were up 22% at $48.13/barrel, coal prices were up 2% at $46/tonne and carbon permits were down 44% to €7.47/tonne.
UK energy prices’ 13 month downward trend came to an abrupt halt this month with extreme volatility on the back of heavy market speculation with net short positions squeezed and new long positions formed.
US economic activity slowed this months with lower growth during Q1 of 0.5% qoq, inflation falling from 1% to 0.9% in March and jobless claims rebounding. Europe was similar, but improving from stagnation, with UK ahead after 0.4% growth qoq and a slight increase in inflation. Japan is on the verge of recession. Chinese growth fell to 6.7% but the important transition to the services and consumers sector stalled. International trade was mixed with across the board falls in all Japan’s exports, and China trade improving but only after large falls in the previous two months.
Oil prices rose 21% during the month despite mainly bearish developments. Iran, Saudi, Iraq and Russia seem to be in a race to increase output ahead of an agreement to freeze output. Prices are rising steeply despite these developments. Speculators are driving price increases with bets on the oversupply imbalance correcting later this year, with very long positions reported by CFTC.
Gas and power markets experienced one of the most volatile weeks in a long time, with prices increasing 14% over four days last week, then falling by about 8% on Wednesday. Given the lack of underlying fundamentals, these price changes were driven by speculators, mainly closing out short positions during a squeeze on speculators who had been caught short.
Despite rising dramatically off last month low point following a 13 months downward trend, current energy prices still provide good value. Potential downside risks include US Fed increasing interest rates, a Chinese hard landing as they try to transition to consumption based economy; faltering oil price recovery; the LNG supply glut forming in Asia-Pacific; and new LNG supplies expected from US.
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 further oil price increases. 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 and new Capacity Mechanism costs.
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