K Wholesale Gas Prices - Pulse Business Energy

Energy Broker: January 2015 Market Report

After a sustained drop in prices across the board during the first half of January, prices stabilised in the second half of the month as the weather turned cold throughout much of the UK.


Gas:
Despite some gas supply disruptions and developing cold temperatures, overall gas supply fundamentals were comfortable during January, meaning the market responses to the cold forecasts for February were much more subdued than might be expected. After a weak start, prices did eventually show signs of support as the month progressed and the weather forecasts changed from seasonal normal to slightly colder. However, it is worth bearing in mind that in past years, similar market conditions and similar cold weather patterns as at the end of January would have caused a significant spike in prices – testament to the healthy supply position. Storage levels remained at comfortable levels for the time of year and, unless there is prolonged colder weather, supply availability is likely to be more than sufficient. Even a slight escalation in the Ukraine/Russia situation did not impact prices. The weakening €, following the Greek elections, also helped keep UK prices down. While the drop in wholesale prices is being reflected in I&C/SME retail offerings, we eventually saw a drop in domestic retail prices too.


Power:
Whereas wholesale power prices continued to take the general lead from the gas market, power was not quite as weak as gas because we saw much reduced wind production; often a feature of cold winters due to either high pressure weather patterns or gusting winds, both of which are bad for wind production. Consequently, gas has been a more dominant source of generation capacity than recent months. The annual 2016 forward power prices were also not as weak as gas dropping about 5% whereas gas dropped almost 10%.


Oil:
Brent prices dropped further during January, only finding some support below $50/bb due to uncertainty of potential Saudi policy changes following the death of Saudi Arabia’s King Abdullah; though any expectation of significant policy changes is likely to be misplaced according to most Middle Eastern experts. While crude oil prices can now be considered cheap, the fundamental position argues against a near term supply response. Moreover, operating costs across the top 20 oil-producing countries are not a significant constraint unless prices drop to USD30/bbl, though breakeven economics suggest that prices are now below long-term equilibrium. A supply response may not be forthcoming until the second half of the year. Nevertheless, it is worth noting that historically significant price recoveries in crude oil have all been accompanied by OPEC reductions though currently OPEC rhetoric remains firmly dovish.


What’s the Outlook?
As we move through early February we are likely to see some price support from cold weather – 2nd week of February is traditionally the coldest week of the year. However, unless the seasonally cold weather is extended throughout February, or there is a significant supply disruption, the fundamental supply/demand position for energy in UK is looking comfortable and so are likely to put downward pressure on prices during the second half of February and in to March. However, there are things to watch that could provide some price support: (i) the contango in the crude oil market is so steep now that demand for prompt oil to put in storage (even floating storage) will inflate short term demand, though this will ultimately delay any crude oil price recovery without intervention by OPEC – this storage demand could be a brake to declining prices at least until oil storage capacity becomes strained or freight rates rise further, (ii) the forward curves for gas and power are looking less weak than last month (i.e. even though the curves are still in a bearish contango they have moved to a less bearish curve) and that could indicate a sign of recovery, (iii) we should not lose sight of the Ukraine situation, which is looking a bit more unstable though the more we progress through winter the less the impact of escalation in hostilities will be.


 

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.

At Pulse, we are always keeping a close eye on the energy market and to see how we may be to help you with our energy broker services, please click here

 

Leave a comment