UK Energy Market Report - April 2017

Oil: The proportionate intervention of the US in Syria has resurrected geopolitical risk as a factor in oil pricing with oil jumping around 5% on the news of the strike. Typically, such events have an impact on oil pricing for a maximum of two weeks, so we would expect this event premium to subside by mid April. Otherwise, oil prices have continued to seek long term direction. Despite record US stockpiles (up 55 million bbl since January) the rebound in Brent (prior to the US action) seems to being driven by increased optimism around OPEC’s ability to curb output and to extend the original agreement on production cuts beyond the end of June. On the back of these prices US output from shale has rebounded and producers have been hedging at these levels which suggests that they believe current pricing is unsustainable. Against this backdrop, it would seem that the much talked about ‘re-balancing’ of the oil market is still some way off.

Economic Data: The US economy continues to improve and the prospect of further interest rate rises has increased. The likely effect of this will be a strengthening dollar and declining (or at least capped) price of oil.

In the UK the Prime Minister has formally triggered Article 50 and two years of talks that will end with Britain leaving the European Union. This coincided with the release of the Purchasing Managers Index which showed a continuing decline since January suggesting that a hint of caution is entering the UK economy - not entirely surprising given the uncertainties (and opportunities) ahead. Europe, in contrast, is recording levels of output growth not seen since the 2008 financial crisis.

Europe: French nuclear output (for the time of year) fell to its lowest level in almost a decade, but several reactors are expected to come back online over the coming weeks subject to safety approval by the regulator.

UK: UK gas exports to mainland Europe reached their highest level since October last year, suggesting that the lack of injection capability into the Rough storage facility may be having an effect. A combination of warmer, but windy, weather and a cluster of LNG shipments all contributed to an improving gas supply outlook. This, in turn, continued to push UK power and gas prices lower over the first half of March, with knock-on effects along the forward price curve.

Given the growing importance of LNG (see last month’s Report), we have added a new chart showing the deliveries of LNG to the UK over the last 15 months - deliveries in March 2017 of 1.7 million cubic meters represents close to 12TWh of energy.

The Spring Budget was delivered after the last Report was sent out, but there was insufficient energy related material to justify an NUS News Flash. The most significant announcement concerned a review of taxation policies to encourage maximising the extraction life of North Sea fields.

The triad season, which runs between November and February, is now over and the transmission reconciliations will be appearing on the April supplier invoices. The three (triad) highest demand periods are only established in retrospect and the kW demand for each supply is averaged over these three peak periods and used to establish transmissions charges. If you are on a fully delivered fixed price contract there is little that you can do to manage these charges. However if you are on a flexible or energy only contract, then by reducing demand during the potential triad periods can reduce annual transmission charges. NUS runs a Triad Warning Service based on data from a number of suppliers and we correctly predicted the three triad periods. Those clients who were able to reduce demand as a result of these warnings will see lower charges over the next 12 months.

National Grid has recently published its Summer Outlook which forecasts that the summer peak demand is likely to be the lowest on record due to the impact of solar panels and small wind projects. The Summer (and corresponding Winter Outlook) are important as suppliers take note of these to help them forecast a number of the non-commodity charges on the invoice which are only determined in retrospect. However, these guidelines are not infallible, as the last Winter Outlook anticipated a colder than average season so consequently large payments under the new capacity Mechanism to standby generators were anticipated. This has not eventuated and there have been significant downward revisions in this component to the benefit of energy only clients.

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