Prices dropped across the board during October 2014.
The Ukraine/Russia situation continues to impact the market, but this time weakening the market, as a deal between Ukraine and Russia looks like it might be real; supplies to Ukraine, and therefore subsequently western Europe, appearing to be secured for this winter as a consequence of Europe agreeing to support the deal finances. Gas storage levels in UK are also relatively high allowing for weaker prices going in to winter, especially as October temperatures have been predominantly above seasonal norm, effectively delaying the start of the winter heating demand surge.
While Power prices generally moved lower in line with the politically driven gas market, spark spreads improved in response to news from National Grid that supply margins will be tighter than usual this winter. This is primarily a consequence of an increased reliance on intermittent renewables and an apparent lack of investment in new controllable and flexible thermal generation starting to impact perceptions of system stability – emphasised by several short term outages and the repeated delay in restarting the Dungeness B22 nuclear plant. However, the relatively small response seen in the market following the Didcot B fire evidences the real day-to-day supply position.
Brent continued its move lower, making ever new lows, driven mainly by more weak demand forecasts on the back of poor European data and what seems to be a continuing trend showing slowdown of China’s growth, which has also further weakened global coal prices.
What’s the Outlook?
As we eventually move to winter temperatures, increasing volatility is likely to be evident in the energy market; potentially driven by variations in temperature and forecasts, further unpredictable developments in the relationships between Russia, Ukraine and EU or political positioning amongst OPEC members concerned about low prices, however, with global refining margins also weak any rally in crude prices is unlikely to be sustained at least in the short term. Things to watch include wind forecasts impacting power generation, news of Russian oil and gas production and gas storage levels.
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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