Weekly UK Insight - 21 May 2018

Gas

p/therm 11 May 18 18 May 18 Change
Day-Ahead (DA) 55.05 56.20 2.1%
Jun 2018 53.89 55.46 2.9%
Q3-2018 54.94 56.28 2.4%
Winter 2018/19 61.93 63.50 2.5%
Summer 2019 48.12 50.10 4.1%

Source: Reuters

The UK’s Day-Ahead gas price increased 2.1% as the combination of unplanned maintenance at Britain’s Barrow North gas terminal, and scheduled outages at three other UK Continental Shelf terminals, is restricting flexibility and available supply into the UK gas system.

Rough gas withdrawals are expected to continue at around 5 mcm/d according to the indicative production schedule published by storage operators Centrica.

Unplanned Norwegian outages at the Kristin and Kvitebjørn gas fields is expected to hinder pipeline flows to Britain at least until the end of this week, with a combined impact of ~22 mcm/d.

Forward prices for Winter 2018/19 rose 2.5% to 63.50 p/therm as higher European gas and crude oil prices were bullish for UK gas seasons.

Ukraine has offered Russian supply Gazprom discounted fees for gas transit to ensure the continued flow from Russia to Europe after 2020. Russia’s Gazprom and five European companies, with German backing, plan to build the North Stream 2 gas pipeline on the Baltic seabed to connect Russia directly with Germany, bypassing eastern Europe and limiting the flows via Ukraine.

However, prices further out for Summer 2019 rose 4.1% after French energy giant Total announced it would pull out of a billion-dollar gas project in Iran by November in the face of renewed U.S. sanctions. With a significant portion of Total’s gas output earmarked for Europe, the decision will reduce the expected gas supply available for European consumers.

UK NBP

Weekly UK Insight 21 May 2018
Source: Reuters

Power

£/MWh 11 May 18 18 May 18 Change
Day-Ahead (DA) 52.01 54.25 4.3%
Jun 2018 53.46 54.62 2.2%
Q3-2018 54.37 55.37 1.8%
Winter 2018/19 59.59 60.88 2.2%
Summer 2019 48.89 50.41 3.1%

Source: Reuters

Day-Ahead power prices rose 4.3% last week to £54.25/MWh, reflecting a higher cost of spot gas and carbon, boosting the cost of generating power from fossil fuels.

Winter 2018/19 power prices also rose, gaining 2.2% in response to higher gas, European power and oil prices. German year-ahead power once again set new 4½-year highs, with recent gains steadily driving forward UK power prices.

UK POWER BASELOAD

Weekly UK Insight 21 May 2018
Source: Reuters

Oil

$/bbl 11 May 18 18 May 18 Change
Brent Crude Jul 18 77.12 78.51 1.8%

Source: Reuters

Brent crude oil prices jumped to their highest level since 2014, up 1.8% to $78.51/bbl, after U.S. sanctions on Iran prompted a host of oil and gas companies to announce their withdrawal from projects in the country.

At the same time, OPEC’s monthly oil market report revealed that the global oil oversupply has now all but disappeared, largely thanks to OPEC and Russian efforts to curb supply. However, a significant decline in Venezuelan output and increased world demand forecasts for 2018 also contributed to the sustained price rise.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 21 May 2018
Source: Reuters

Exchange Rates & Economics

£/$ 11 May 18 18 May 18 Change
GBP/USD 1.3541 1.3471 -0.5%

Source: Reuters

The Pound Sterling was fell in value versus the U.S. Dollar as investors prepared for inflation and GDP growth data that could determine whether the Bank of England raises interest rates this year.

The U.S. Dollar also rose in value following reports that the U.S. was putting its trade war with China on hold after the world’s two biggest economies reported progress in talks aimed at bringing down America’s trade deficit with Beijing. No specific amount has been agreed but the U.S. had sought to slash the deficit by $200 bn.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 21 May 2018
Source: Reuters

Regulatory and Market News

Total set to pull out of Iran gas deal as a result of U.S sanctions

French energy giant Total is preparing to pull out of a billion-dollar gas project in Iran in the face of renewed U.S. sanctions. Total said it will unwind operations by November unless sanctions are waived.

Following the international agreement three years ago to ease the embargo against Iran, companies began exploring trade and investment with the former isolated state.

Some including energy, aerospace and rail engineering firms agreed preliminary deals, but those have now been thrown into uncertainty.

Earlier this month President Donald Trump withdrew the U.S. from the international deal with Iran.

Going against advice from European allies, he said he would reimpose economic sanctions that were waived when the deal was signed in 2015.

While European governments continued to support the deal with Iran, firms which operate internationally risk falling foul of the reinstated U.S. embargo.

Total’s announcement comes after Denmark’s Maersk, which operates oil tankers globally, said it would fulfil commitments in Iran already on its books but would not enter into any new contracts. Another Danish oil tanker operator Torm has also said it would stop taking new orders in Iran.

LINK: Total – withdrawal from Iran gas project

Changes to Contracts for Difference rules to cost UK consumers £100m a year over the next 15 years

An investigation into rule changes made to the Contracts for Difference (CfD) second auction round has found that it will increase costs to UK consumers by £100 million a year for the next 15 years.

Last year, BEIS awarded 11 CfD’s to a number of renewables projects across the UK, including Moray Offshore Wind Farm (East) and Grangemouth Renewable Energy Plant.

Three offshore wind farm projects, generating a total of 3.2 GW, swallowed up all but a small proportion of the 3.3 GW of capacity awarded contracts in last September’s auction. However, projects were then rejected if they would bust the cap on capacity being procured through the process.

This meant that eight small-scale projects, which were more expensive per unit of electricity generated, won out at the expense of larger and cheaper schemes, according to the National Audit Office report.

LINK: National Audit Office – 2017 CfD investigation

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