Price Risk Report - 31 August 2016

Last Month Summary

UK electricity and gas prices declined for the first time in five months, as gas storage operator Centrica announced that the withdrawal capacity at Rough Storage would be higher than expected this winter. An oversupplied gas system also drove prices lower as traders reacted to bearish sentiment in the energy markets, however, climbing oil prices towards the beginning of the month limited electricity and gas losses. Gas prices were down 7.9% to 1.30 p/kWh and electricity prices fell 3.5% to 4.17 p/kWh.

Oil prices briefly topped $50/bbl, before ending the month up 10.8% at $47.04/bbl. Price gains were a response to comments from Saudi Arabia and Russia increased the likelihood that the major oil producing nations would discuss coordinated action to help balance prices and achieve stability in the market. Coal prices were down 5.3% at $57.95/tonne while carbon permits were up 0.7% to €4.50/tonne.

Energy Price Outlook

Bearish drivers that have the potential for prices to fall are:

  • an LNG supply glut leading to an oversupply in North West Europe;
  • a decline in global oil prices resulting from an oversupply in refined oil products; and
  • a recovery in the value of the Pound making gas imports cheaper.

On the other hand, bullish energy price risks include:

  • the impact of Rough Storage’s limited gas stocks this winter on energy prices;
  • coordinated action between OPEC and Russia to freeze crude output;
  • a recovery in the EU and US economies; and
  • tight electricity supplies in UK over the next couple of winters.

For the coming month, the uncertain status of Rough Storage is expected to be the key energy price driver, providing significant volatility to markets. The expected withdrawal capacity at Rough Storage has been raised significantly from just 6 mcm/d to around 35 mcm/d for the coming winter boosting flexibility. However, with gas stocks at Rough Storage only around 41% full, Britain’s ability to meet winter demand will be heavily reliant on UK temperatures and LNG imports.

Recommendations: While marginally lower prices may be on offer during September, current gas and electricity prices provide excellent value for energy buyers. Considering the significant risks of higher prices, energy buyers may benefit from locking out fixed contracts, or hedging some volume in flexible contracts, for up to three years immediately. This may allow energy buyers to take advantage of current low energy prices and reduce the risk of sudden price increases, driven by Winter 2016/17 supply and demand shocks.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 31 August 2016
Source: Reuters

Gas and power decline as Rough’s winter withdrawal capacity increased

Winter gas supply risks have subsided to some degree, thanks largely to greater gas supply flexibility at Rough Storage this winter and the high number of LNG cargoes heading to the UK during September.  The result has been lower gas and electricity prices across the forward curve.

Centrica unexpectedly announced that it could return 20 wells to service for withdrawal operations, rather than just 4 wells as previously confirmed. This would allow gas withdrawals at a rate of approximately 35 mcm/d, not far below the facility’s typical 42 mcm/d capacity. Gas injections are still offline until 2017, but the increase in withdrawal capacity will provide greater flexibility for the gas system to balance daily supply and demand during winter months.

Oil rises as Russia and Iran support OPEC action to freeze output

Brent crude oil rose 10.8% over the course of August, briefly surging above the $50/bbl mark before settling at $47.04/bbl. Leaked comments from Saudi energy minister Khalid al-Falih revealed that Saudi Arabia was ready to take action to help the oil market rebalance, in cooperation with OPEC and major non-OPEC exporters. Since then, Russia and Iran have both revealed their support for coordinated pricing actions, which we understand will be discussed at a meeting of oil-producing nations taking place in Algeria from 26 to 28 September. However, even assuming an agreement were to lead to a freeze in production, the market would not be expected to see any real relief in the immediate future.

UK consumer confidence at 3-year high in August

A rise in consumer spending helped the UK’s economic grow in the months leading up to the EU referendum, with little sign the vote hurt investment or the wider economy during the start of 2016. The Office of National Statistics confirmed a previous estimate that GDP growth picked up to 0.6% in Q2-2016, from 0.4% in Q1-2016. The figures will be a boost to the Chancellor, Philip Hammond, who has repeatedly asserted that Britain entered the post-referendum period from a position of strength. Since the Brexit vote, both the automobile and retail industries have grown, and consumer confidence increased to its highest level in three years this August. But economists said the economy would be tested in the coming months.

Case for US interest rate hike strengthening, says Federal Reserve

In light of the continued solid performance of the labour market and the outlook for economic activity and inflation, US Federal Reserve Chair Janet Yellen said the case for another US interest rate hike is strengthening, sending a strong signal that the US central bank is preparing to increase rates as early as September.

Donald Trump is still very much in the running for the US presidency ahead of November’s election, however with Democrat Hillary Clinton leading by 5 percentage points in the latest polls, financial markets are less concerned about the impact of the Republican nominee’s unclear economic, trade and foreign policy plans.

Non-Energy Costs

With the Government deciding to bring the Capacity Market scheme forward by a year, non-energy costs for Winter 2017/18 remain particularly uncertain. 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.

Beond Risk Services

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.

Download

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.