UK Energy Market Report - January 2018

Comment: As we welcome 2018, amid global stock markets on a record high, stop-start Brexit talks, tensions between the US and North Korea and a bitcoin bubble, the past year was the greenest year on record for the UK. Several milestones were reached, including the UK having its first 24-hour period without using any coal power since the Industrial Revolution, and for the whole of 2017 for the first time, wind, nuclear and solar power contributed 50% of all generation.

Since 2012, the UK has halved its carbon emissions from the electricity sector, and now provides the fourth cleanest power system in Europe and the seventh worldwide. Recent strategic initiatives by the Department of Business, Energy & Industrial Strategy and also the Scottish Government in the area of low carbon technologies provides evidence of the Government’s ongoing commitment to reduce carbon across all sectors. NUS, through its Energy Services team, has a range of strategies and access to technologies to assist our clients to lowering their carbon emissions.

Oil: Whilst we have been bearish on oil for some months and in the longer term remain so, a combination of events suggests that in the short/medium term the oil price is likely to continue in the current range and may go even higher.

The bullish factors pushing up the price of crude includes the continued output curtailment by OPEC and its allies until at least June when a review is scheduled, the expected listing or sale of a 5% stake in Saudi Aramco during the year (it has just converted to a joint stock company), the reduction by Libyan output following a pipeline explosion at the country’s largest export terminal (this crude is low sulphur and an important feedstock for European refining operations), the geopolitical situation in Iran with mass protests against the regime and the increase in world demand by 5 million bbl/d (roughly 6%) over the last three years with the IMF predicting global growth at 3.6% in 2018. Based on this it is no surprise that there is a drawdown in US stockpiles. However, the return of the UK Forties pipeline to operational (if reduced throughput) mode will release some pricing pressure while the EIA has just released a forecast that US production will reach 11 million bbl/d by the end of 2019 - this is an increase of over 10% on top of current production. In addition Russia and OPEC are not natural allies, and it is likely that their strategic directions will diverge at some point, possibly by mid 2018 as there is mounting pressure from the Russian oil industry to bring more fields into production. In addition, there is no doubt that the global increase in oil demand has been stimulated by the lower prices over the last two years which have now largely evaporated so demand growth may plateau. The wild card is the herd mentality of the hedge funds and when they decide to take profits.

Coal: The calendar 2019 contract continues to firm, with pricing up by around 3.5% from December levels*, based on global growth forecasts and the continued development of new coal fired generation projects in India and China and supply constraints as banks and investors are increasingly reticent to back new mines. In addition European demand may not decline as sharply as previously expected (see below). *Eagle eyed readers will note that we have recast the Dec 2017 price for coal - this is due to the expiry of the 2017 annual contract.

Europe: German power prices for 2020 have dropped sharply after coalition talks signalled that more coal plants may operate for longer than previously expected. The latest market move followed indications that the next government will ease demands to close the most polluting lignite coal plants in former East Germany. Retention of these generators would mean the electricity market will remain oversupplied, with both coal plants and new wind and solar farms feeding the grid. This marks a big shift from November, when it looked as if 8,400MW of coal generation capacity would be withdrawn by 2020. In the Netherlands, there are renewed concerns over Groningen gas production following another earthquake in the region and comments by the Dutch government raised expectations of a further cut in the production quota.

UK Gas: The gas market has been well supplied, with strong flows via the interconnectors from both the Netherlands and Belgium, as well as good flow from Norway. Higher than anticipated temperature forecasts have added to bearish sentiment and led to a softening in prompt prices, which have also fed through into forward contracts, in spite of bullish oil markets. The annual gas contract is almost flat against December pricing, and should the mild weather continue over the remaining winter period, then further softening could be expected.

UK Power: Baseload contracts have taken direction from the underlying gas contracts, with current pricing also flat month on month and likely to soften in line with gas should the benign weather conditions continue.

LNG: Deliveries has been consistent with the same period in 2016 and given the Asian demand for LNG it is not expected that this will significantly change until towards the end of the Northern Hemisphere winter.

Government Reshuffle: We are glad to see that there have not been any significant changes to the Department of Business, Energy & Industrial Strategy for, as we noted recently, there has at last been some joined up thinking emerging in respect of UK energy policy. In addition, NUS has been prompting with both the Department of Ofgem an initiative to regulate third party intermediaries (TPIs) and to improve transparency of TPI charges on supplier invoicing. Based on some unacceptable practices which we have recently observed, some degree of regulation is necessary and we have been working on a structure which would be simple to implement and administer while providing benefits to all industrial and commercial energy consumers.

Download Full Report