Weekly UK Insight - 31 May 2016

Gas

p/therm 20 May 16 27 May 16 Change
Day-Ahead (DA) 29.95 32.05 7.0%
July 16 29.55 31.03 5.0%
Winter 16/17 35.73 36.41 1.9%
Summer 17 33.15 33.62 1.4%

Source: Reuters

Seasonal gas prices for the coming winter rose 1.9% last week, as storage injections halted during scheduled maintenance at Rough storage between 25-30 May. UK gas stocks are typically refilled during the summer period in order to prepare for higher winter consumption, but current storage stands at just 28% of capacity. Higher oil and coal markets also supported seasonal gas gains.

The five-day Rough storage outage freed up an additional 20 mcm/d of gas supply, which would otherwise have been injected into storage. Supplies were also supported by an increase in Langeled pipeline flows from Norway, which rose from 15 to 34 mcm/d.

However, the increase in supply was largely soaked up by rising domestic consumption. Temperatures fell as much as 3°C below seasonal normal levels last week, resulting in an increase in heating demand.

LNG send-out was marginally lower despite all three terminals receiving cargoes last week. Send-out from South Hook terminal averaged around 41 mcm/d, and Dragon terminal send-out dropped to 3 mcm/d.

This week has opened with higher prices, reflecting an increase in gas demand. Actual temperatures have fallen more than 1°C below seasonal normal levels today, boosting heating demand. However, the UK may be impacted over the coming weeks by the start of scheduled maintenance at several major Norwegian gas fields.

UK NBP

Weekly UK Insight 31 May 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 31 May 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 31 May 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 31 May 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Al Khattiya 126 31 May Qatar South Hook
Zarga 159 03 May Qatar South Hook
Gaslog Salem 155 05 May Qatar South Hook
Al Gharrafa 163 09 May Qatar South Hook

Power

£/MWh 20 May 16 27 May 16 Change
Day-Ahead (DA) 34.28 33.75 -1.5%
July 16 32.81 33.80 3.0%
Winter 16/17 40.11 40.44 0.8%
Summer 17 34.52 34.73 0.6%

Source: Reuters

Seasonal power prices rose more than 0.5% last week, tracking upward movement in the forward gas curve. The Winter 16/17 price lifted 0.8% to a 10-day high, underpinned by rising oil, coal and carbon emissions markets. Engie’s confirmation that its 1GW coal-fired Rugeley power plant will close in June is likely to exacerbate concerns that supply margins will be tight during the upcoming peak winter period.

Heysham 1 nuclear plant returned to service last week following a planned outage, returning around 1.2GW of capacity to the Grid. However, the ongoing outage at Sizewell B is expected to continue until at least 8 June, limiting nuclear capacity by more than 1.3GW over the coming weeks.

Hartlepool 2 is scheduled to be taken offline in June for scheduled maintenance, reducing nuclear capacity by around 590MW. Above seasonal normal temperatures are forecast to reduce heating demand this week. Maximum power demand has been forecast to average under 30GW for the second week in a row.

UK POWER BASELOAD

Weekly UK Insight 31 May 2016
Source: Reuters

Oil

$/bbl 20 May 16 27 May 16 Change
Brent Crude Jul 16 48.72 49.32 1.2%

Source: Reuters

Brent crude oil prices rose just $0.60/bbl week-on-week, although the market did briefly break above the $50/bbl mark on Thursday. The market was driven higher by news of declining US crude stocks, temporary disruptions in Libyan and Nigerian production, and positive economic indicators.

Further increases in crude oil prices above the $50/bbl level may incentivise shale oil producers in the US to increase domestic oil production. However, a significant rise in global oil supply may also act to curtail further gains in crude oil markets.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 31 May 2016
Source: Reuters

Coal

$/tonne 20 May 16 27 May 16 Change
API2 CIF ARA 2017 47.00 49.10 4.5%

Source: Reuters

European coal prices rose 4.5% last week, driven by news combined coal stock levels at three terminals in western Europe’s Amsterdam-Rotterdam-Antwerp trading hub slipped to 3.1 million mt, the lowest level recorded so far in 2016. European coal stocks are now 37% lower compared to the same week in 2015.

Falling continental coal stocks partially reflect the decision of many European consumers to transition away from polluting fuels. Germany and the UK have made significant cuts in coal consumption over the last 12 months, with demand falling 24% year-on-year.

COAL – API2 CIF ARA 2017

Weekly UK Insight 31 May 2016
Source: Reuters

Carbon

/tonne 20 May 16 27 May 16 Change
EUA Dec 16 6.01 6.09 1.3%

Source: Reuters

European carbon prices rose 1.3%, as emissions prices made further modest gains above €6/tonne. The price of carbon allowances was driven higher partly by stronger oil markets, and further increases in German forward power prices also provided support.

UK MEP Ian Duncan is due to publish a report on post-2020 EU Emissions Trading System reforms this week. The report is expected to propose to keep the annual cap reduction of carbon emissions at 2.2%, however a higher figure could see carbon markets rise.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 31 May 2016
Source: Reuters

Exchange Rates & Economics

£/$ 20 May 16 27 May 16 Change
GBP/USD 1.4500 1.4620 0.8%

Source: Reuters

The US dollar exchange rate rose to a three-month peak on Wednesday after Chair of the US Federal Reserve Janet Yellen suggested US interest rates could be increased in June or July if economic growth and the labour market registered a notable improvement.

Britain’s economy grew at 0.4% during Q1-2016, despite a slump in manufacturing and construction output that has dragged down GDP growth over the last year. If growth continues at this tepid pace, the Bank of England could consider a cut to interest rates.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 31 May 2016
Source: Reuters

Regulatory and Market News

First fracking operation in England since 2011 given local approval

Local government officials in North Yorkshire have approved a shale gas fracking application from Third Energy. The move points to a growing support for shale gas that the UK Government hopes can counter the decline in North Sea gas production.

Fracking involves extracting natural gas trapped in tight layered rock formations by injecting high-pressure water, sand and chemicals. Third Energy said it was currently aiming to start fracking work on a test basis before the end of the year.

CEO Rasik Valand said: “If this flows then we will need to assess how it performs for some months before making any conclusions.”

Third Energy is the first company in five years to receive local government approval for a fracking permit. Last year, competitor Cuadrilla Resources had two permits rejected by regional officials in Lancashire, however the Department of Energy and Climate Change has since changed the law to allow Government to have the ultimate say in shale gas related applications.

Cuadrilla is currently on schedule to commence testing in mid-2017, placing Third Energy at the forefront of Britain’s race to develop shale gas resources.

In the US, vast quantities of fracked gas have already seen energy prices plummet, providing both US producers and the wider economy with a stimulus for growth. The supply boost has seen US gas prices fall to just a third of gas prices in the UK.

The Government has championed the potential benefits of shale gas, arguing that fracking could drive down prices. Official studies suggest Britain could have vast resources of shale gas trapped in rocks beneath the ground that could help improve the UK’s security of supply for several decades.

But until fracking takes place, it is not known how much of the UK’s shale gas could be commercially extracted. Production is expected to be more expensive and problematic in the UK than in the US because it is more densely populated. Given the limited number of wells that have been drilled in the UK, it is too early to say what impact shale gas can have on gas prices.

LINK: Third Energy website

Rugeley coal-fired power station set to close by the end of June 2016

Engie has confirmed that it is to begin decommissioning its 1GW coal-fired Rugeley power station by the end of June 2016. The company previously announced its plan to cease market operations in early summer 2016, as a result of the deterioration in market conditions for UK coal-fired power generation. The squeeze on fossil fuel generators has been intensified by tougher EU controls on carbon emissions aimed at reducing dependence on fossil fuels. Engie said: “The closure of coal-fired generation capacity in the UK reflects a wider energy transition that is taking place towards a less carbon-intensive and more decentralised energy system.” But in the face of tight winter supply margins, some coal plants are staying online by agreeing contracts with National Grid to provide back-up power to the electricity network. The Government has already bought 3.6 GW for the coming peak winter period in order to avoid the risk of power blackouts. The scheme is expected to add a further £1.50 to the average annual household bill.

LINK: Rugeley power station news

National Grid and RES launch UK’s first sub-second frequency response service using battery storage

National Grid and renewable technology firm Renewable Energy Systems (RES) are preparing to launch the UK’s first battery energy storage system that is able to provide a frequency response service in sub-second timescales. The two organisations have reached a four-year agreement that will see RES provide 20MW of frequency response from its battery storage system. RES expects the battery to be fully operational within the next 18 months.

Dynamic frequency response services are where groups of companies are contracted by National Grid to automatically vary their power consumption in order to balance the Grid network. The service is becoming increasingly crucial to maintaining a stable electricity system, as large-scale power plants are decommissioned and more intermittent renewables come online.

Beond are working closely with clients who can use their chillers and freezers to sell frequency response to National Grid in competition with batteries and traditional power stations.

LINK: RES press release

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