It’s been a very volatile week for energy prices. This is due to the Dutch government announcing the capping of the Groningen gas field (which is Europe’s largest gas field) due to “tremors” (sceptics would use other terms for it).
From the following link (http://royaldutchshellplc.com/2015/02/10/dutch-cabinet-acts-in-response-to-groningen-gas-field-earthquakes/) you can read that this cap only actually reduces production by a small amount compared to what was already planned for 2015 (NB: there was already some cap in place). This supply difference should only impact prices by a small amount, especially in the current reasonably well supplied environment.
However, the market will be imposing a ‘risk premium’ related to whether the investigation might lead to further cuts in production. There may even be some premium associated with the risk of a wider impact on production from other fields, which could be a lot more significant, though in our opinion this would be a massive over-reaction without evidential grounding.
So on a day to day basis, it would seem availability is not short and the market balance can still be relatively easily achieved. Of course, this puts a slightly heavier reliance on UK Gas Storage and the hiccups we have seen in flows from there become more important. The ‘bulls’ are looking for reasons to push up the market though we would say the extent of the impact has been far less than might have happened in past years, implying the market supply/demand is still comfortable.
So we think there will be a step up in prices but we doubt continued upward pressure. Most probably we have already seen the main jump, unless there is some as yet unannounced news to come of course. From a UK weather perspective the next week or so is expected to be warmer than seasonal norm and so demand will put downward pressure on prices, as does the weakening € due to Greece’s status in the Eurozone.
The impact on power should be less as coal generation can meet any short term supply constraints.
Also the ceasefire being agreed in Ukraine today should ease supply and sanction concerns from Russia and could provide a counterpoint to upward pressure over the coming weeks.
Dr Tony West has worked in a variety of institutions at a senior level; most recently as Head of Power Business Coordination at Gazprom Marketing & Trading, spearheading Gazprom Group’s move in to gas-fuelled generation, having developed the group strategy in the context of securing demand for Gazprom’s gas, and prior to that as Head of Trading at Scottish Power.
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