Oil: There is a continuing tussle between the OPEC production cuts and US shale production balancing the emerging increase in global demand. Sentiment is still reacting to announcements concerning stockpiles, and for the first time in some months there appears to be a recognition of increasing geopolitical risk in the pricing. During the month, Brent crude broke through the $60/bbl level, its highest in two years, on threats from Turkey of a possible halt in oil exports from Iraqi Kurdistan following their referendum on independence. This is probably an empty threat as Turkey needs Iraqi oil and also benefits from its export through their terminals. A more significant threat is President Trump’s antagonism to President Obama’s agreement to lift sanctions on Iran. If these are re-imposed, then up to 2 million bbl/d of oil could be withdrawn from the market - significantly more than the current OPEC cuts.
The bulls are finding some support for their case in the commercial stockpile statistics which suggest that both crude and refined products inventories are shrinking, having fallen in July to 190 million barrels over the five-year average, compared with a 302 million-barrel surplus in January of this year. However, we would caution that a reduction would be expected at this time of year, and the stockpiles remain historically high. It would appear the market has taken this fact on board with the price now having fallen back to $55.50/bbl in line with the trading pattern observed over the last 12 months.
Conventional oil has made major advances in reducing the costs of exploration and production and next year total non-OPEC growth could reach as much as 1.4 million bbl/d, which would have a significant dampening effect on prices. Whilst OPEC continues to talk the market up, any increase in inventories could well signal a pullback in pricing to $50/bbl or below.
Coal: Coal prices eased back form the highs seen last month, as sentiment changed on the back of a proposed strike by South African miners being called off, and signals from the government in Beijing that they would be willing to relax curbs on indigenous production. In addition, industrial activity in China once again seems to be declining which will reduce international demand. Coal for 2018 delivery is now trading at just below the $80/tonne, slightly below the levels seen a month ago and considerably below the inter-month high of close to $85/tonne.
Europe: Whilst the prospect of Catalan secession from Spain is piling pressure on the minority government and unnerving Spanish financial markets, the European energy markets continue to be led by continuing problems with the French nuclear generation fleet. The closing of the 3.7GWh Tricastin nuclear plant for a month reminded customers of last year’s electricity crisis and heightened concerns over continuity of supply into 2018 and beyond. However, current above average temperatures in Europe are helping ease demand side pressures.
UK Gas: Despite the closure of the Rough storage facility, prices in the wholesale market have softened slightly as improvements in supply from the Norwegian sector, and the mild weather, have helped alleviate some of the short-term concerns about the winter period. However, it is inevitable that the closure of Rough will lead to great volatility in gas prices over this period.
Of greater interest is the LNG situation which equates to short-term gas storage and is important for the overall balance of the system. Both the number of tankers and the capacity delivered during July-Sept 17 was considerably down on the equivalent period in 2016 (see chart). Whilst US exports to Asia have been disrupted by the hurricanes, there is an increasing demand for LNG and the UK hasn’t been able to attract sufficient cargoes at the prevailing prices. This shortfall is likely to add to pricing volatility.
UK Power: Plans by the UK government to publish a draft law to cap household energy prices may have had a negative impact on the share price of the UK’s major suppliers, but power prices have also eased in line with the movement in both gas and coal prices. This decline has been aided by the milder temperatures and increase in solar output, but the concerns about French nuclear output are helping to support pricing further out on the curve. In addition, the increasing volatility of gas which now fuels a large part of our baseload power requirements, suggests that power prices may also seesaw during the winter.