Weekly UK Insight - 16 September 2019

Gas

p/therm 6 Sep 19 13 Sep 19 Change
Day-Ahead (DA) 25.10 30.00 19.5%
Oct 2019 31.96 38.15 19.4%
Winter 2019/20 45.31 49.51 9.3%
Summer 2020 42.41 44.52 5.0%

Source: Reuters

The UK’s Day-Ahead gas price hiked 19.5% to 30.00 p/therm after EDF revealed it had discovered problems with some of the components in its nuclear reactors, raising the risk off plant outages leading to a surge in gas demand to be used in power production.

Seven LNG cargoes are scheduled to arrive at British terminals within the next two weeks, boosting LNG send-out from 20 mcm/d to 41 mcm/d week-on-week.

However, these deliveries are only expected to fill the void left by summer maintenance outages at Norway’s Troll and Orman Lange gas fields. Britain’s Easington terminal is also shut down for planned maintenance until 24 September. As a result, Langeled pipeline flows are zero.

Overall, this has left the UK gas system around 2 mcm/d undersupplied.

Winter 2019/20 gas prices jumped 9.3% higher week-on-week to 49.51 p/therm, as the risk of major nuclear outages across the Northwest Europe (primarily the UK, France and Belgium) could boost demand for gas to be used in power production during Britain’s coldest months when heating demand is highest.

EDF has confirmed that at least five nuclear reactors will be affected. However, clients trading on the forward market would be wise to lock out any remaining winter volume as soon as possible so as not to be exposed to further price volatility.

There is now less than 2 weeks to lock in contracts for 1 October delivery. Customers who have not bought their energy yet will need to do so, driving prices higher.

UK NBP

Weekly UK Insight 16 September 2019
Source: Reuters

Power

£/MWh 6 Sep 19 13 Sep 19 Change
Day-Ahead (DA) 33.72 36.91 9.5%
Oct 2019 41.18 46.50 12.9%
Winter 2019/20 50.82 54.98 8.2%
Summer 2020 46.67 48.99 5.0%

Source: Reuters

Day-Ahead power prices rose 9.5% to £36.91/MWh, responding to higher gas and coal prices, increasing the cost of burning fossil fuels for power production.

Winter 2019/20 power prices jumped 8.2% to £54.98/MWh, tracking higher gas, coal and carbon prices following EDF’s announcement that at least 5 nuclear reactors are affected by problems the recent announcement of nuclear welding component issues.

Britain and France have been severely stung by the impact of unplanned nuclear outages in recent years. In the second half of 2016, France’s nuclear regulator ASN ordered EDF to close up to a third of its 58 nuclear reactors for months on end for safety checks.

UK POWER BASELOAD

Weekly UK Insight 16 September 2019
Source: Reuters

Oil

$/bbl 6 Sep 19 13 Sep 19 Change
Brent Crude Nov 19 61.54 60.22 -2.1%

Source: Reuters

Brent crude oil prices fell 2.1% week-on-week to $60.22/bbl, as concerns about global economic growth outweighed hints of progress in the U.S.-China trade dispute. As a result, U.S. energy firms reduced the number of oil rigs operating for the fourth week in a row as producers cut spending, leading to slower growth in crude output.

However, the coming week is likely to post significant gains after drone strikes on a Saudi Arabian oil facility removed 5.7 million bpd of the country’s daily crude production, equating to around 5% of global supplies. In August, Saudi Arabia produced 9.85 million bpd.

The U.S. has blamed the attack in Iran, who deny the accusations. In response, U.S. President Donald Trump authorised the release of America’s emergency oil reserves “if needed” to offset any disruptions.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 16 September 2019
Source: Reuters

Exchange Rates & Economics

£/$ 6 Sep 19 13 Sep 19 Change
GBP/USD 1.2281 1.2500 1.8%

Source: Reuters

The Pound Sterling rose in value versus both the US dollar and euro last week after being boosted by speculation suggesting the British government could be softening its red lines on the so-called Northern Irish backstop in pursuit of an amicable exit agreement with the EU ahead of a 31 October 2019 deadline.

The Pound was higher as investors speculated the UK government might be open to some form of regulatory and legal divergence between Great Britain and Northern Ireland.

This came following reports claiming Prime Minister Boris Johnson is contemplating such a move in order to improve his prospects of securing a deal after opposition MPs and Conservative Party rebels tied his hands in the negotiations earlier this month.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 16 September 2019
Source: Reuters

Regulatory and Market News

Netherlands to halt core Groningen gas production by 2022, eight years earlier than planned

The Netherlands will halt production at Groningen, Europe’s largest onshore natural gas field, by 2022, eight years earlier than initially planned, the Dutch government said on Tuesday.

Groningen produced nearly 54 billion cubic meters (bcm) of gas in 2013 before tremors blamed on drilling damaged buildings and prompted a series of lowered caps on output and protests by residents and campaigners.

An unusually strong earthquake in January 2018 prompted the government last year to promise to end production by 2030.

But Economy Minister Eric Wiebes last month signaled the end could come a lot sooner, citing greater capacity to convert high calorific imported gas to the low calorific standard of Groningen gas and a switch by large industrial users to other sources of energy.

These measures will enable production to fall to zero by mid-2022, assuming average weather conditions, Wiebes said on Tuesday.

After that, the field will be kept operational until 2026 at the latest, he said, in order to meet high demand for gas on exceptionally cold winter days.

A 3.4 magnitude earthquake in May increased pressure to end production faster than planned, as the gas sector regulator called for an immediate 40% reduction, to less than 12 bcm, to limit seismic risks.

On Tuesday, the government set a production cap of 11.8 bcm for the 12 months through October 2020.

This reduction will cost the Dutch state around €400 million, while a preliminary agreement with Shell and Exxon Mobil on the future use of the Norg gas reserve has resulted in a €90 million settlement.

LINK: Reuters – Groningen halting gas production

SSE sale of retail business to Ovo Energy creates new domestic UK energy giant

Ovo Energy is set to become the UK’s second largest energy supplier after it agreed to buy SSE’s domestic retail supply business for £500m. The deal is expected to be completed in late 2019 or early 2020.

Ovo – which was created 10 years ago – is already the UK’s largest independent energy supplier, with 1.5 million customers and about 2,000 employees. But it will now take on SSE’s 3.5 million customers and 8,000 staff, making it second only to British Gas.

SSE said it would “do all it can to ensure a smooth transition for customers and employees”. SSE – one of the ‘Big Six’ energy suppliers – said there would be no immediate impact on customers after completion.

It added that the SSE brand would be operated by Ovo under licence for a period, “allowing time for a phased and carefully managed migration and continued high standards of customer service”.

Stephen Murray, energy expert at MoneySuperMarket, said Ovo’s deal to buy SSE’s business “will enhance the ever-growing competition for customers”. The likes of Ovo, Shell, Bulb and Octopus mean there’s a base of emerging suppliers who are continuing to challenge the Big Six in the domestic energy market.

LINK: BBC – SSE selling domestic supply to Ovo

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.