UK Energy Market Report - June 2017

Oil: Investors were left largely unimpressed by the outcome of OPEC’s meeting of the 25th May, when members agreed to extend production cuts for a further 9 months until 31st March 2018. Markets had anticipated this outcome, with investors disappointed that no further cuts to production were sanctioned beyond the 1.8m barrels per day currently agreed, shared between OPEC and non OPEC producers. Oil prices, which had traded up to the $55/bbl level in May, have since fallen as the markets absorbed the implications of this decision and the increase in US stockpiles.

As US output continues to increase there is continuing scepticism as to whether prolonged cuts by OPEC and its allies will succeed in clearing the global surplus with expectations that the chronic oversupply is now likely to remain throughout 2017.

US: The announcement by President Trump to withdraw the US from the Paris Climate Accord to negotiate a better deal chimes with his “America first” foreign policy doctrine. However, we do not believe that that will lead to a widespread return to a coal based economy as cheap gas and continued investment in renewables (especially on the West Coast) suggests that market forces and innovation, rather than policies will dictate the outcome.

Middle East: The regional crisis between Saudi Arabia and its allies with Qatar, cutting diplomatic ties and imposing a blockade, will remind investors that the Middle East is a region where political and religious issues can suddenly ignite. This self-generated instability is something that Saudi Arabia can ill afford, particularly when it’s seeking to raise billions of dollars from foreign investors by selling a small stake in Saudi Aramco, to state owned oil giant.

A more immediate implication for the UK is that much of our LNG currently is sourced from Qatar which now cannot use the Suez canal for shipments to Europe, having instead to steam around Southern Africa adding 10 days to delivery times.

Europe: In France, President Macron’s plans to increase growth were given a boost by the results of the first round of legislative elections. Should this momentum be replicated in the second round of voting on 18th June, Macron would have a sizeable majority in the Assembly, giving him the opportunity to push through labour law reforms and boost productivity.

Coal has remained around $65/tonne over the last few months and demand is likely to continue through the summer as lower than normal levels in Europe’s hydro lakes suggest that coal will need to be used as base load to cover the hydro gap. Of interest, the first cargo of LNG from the US to Central Europe has recently berthed in Poland, a first taste of a supply route which will become more developed over the next few years.

UK: It is too early to make any sensible comments over the debacle in Westminster but the odds now seem to favour the Union being retained and with it greater certainty for investors in the North Sea oil and gas fields. Less certain is the mooted price cap on domestic electricity supplies, although the threat of renationalisation of the electricity sector seems to have receded.

Electricity and gas prices had a flurry in late May driven largely by an increase in the oil price ahead of the OPEC meeting and also further restrictions on gas delivery from the large Dutch gas field, Groningen. The expectations are that prices should retreat through the remainder of June and into July given the oversupply of gas which would normally be used to restock the Rough storage facility. This may now be tempered by the sharp decline in Sterling against the Euro following the election which is likely to result in increasing demand from Europe to rebuilding depleted gas storage levels.

On this basis we strongly advise all clients with October renewals to look at tendering in the coming weeks. Maintenance is scheduled for a number of generation and gas supply facilities in mid to late Q3 which is likely at that time to result in a firming of prices across the board.

LNG cargoes arriving in the UK reduced to 4 (from 8 in both March & April), a large reduction on the eleven deliveries during May 16. We were anticipating two cargoes from Qatar around mid-June, but given the international situation outlined above these may now not arrive until early July.

A final reminder to those clients looking to participate in NUS Optimal for the contract year commencing Oct 17 - decisions need to be communicated to NUS by 30th June.

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