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Utilities & Environmental

Energy Update for 17th January 2018

By 17th January 2018April 4th, 2019No Comments

This report will cover from the period just before Christmas until the current time and I’ll also have a look at what we might expect in 201 going forward.

Prior to Christmas, we saw a price spike, particularly in gas. This was a result of a leak in the 40’s pipeline from the North Sea and also an explosion at one of the gas hubs in Belgium. These created a degree of panic on the market resulting in the spike, despite the fact that, in fact, the UK was well supplied with gas and there were no real problems with meeting demand here in the UK, even during the cooler weather periods.

The price fell back a little bit but not to the level prior to that spike. Across Christmas, obviously, a quieter trading period and prices remained fairly static until the end of last week where, once again, factors in the gas infrastructure, pushed prices up. In this case, it was due to earthquakes affecting the Groningen gas field, the biggest European gas field we have.

That will result in caps in production and, not surprisingly, once again, the trade has wade in, pushing prices up. However, once again, the gas market remains well supplied here in the UK despite that and despite the fact we’ve had fairly infrequent LNG deliveries due to demand over in the Far East.

So, all in all, what we’re seeing is the volatility driven by price speculation and trading activity rather than necessarily the fundamentals. Behind the scenes, we are seeing increases and a steady increase in oil prices and that’s certainly affecting the curve further along though a relatively strong pound is helping offset some of those increases. However, all in all, prices are up here at the beginning of the year.

Looking forward into 2018, as ever, it’s very difficult to predict exactly what will happen but we can have a look at what the key factors will be that will drive price and, from that, maybe deduct the likely direction. The key drivers of price in the UK in terms of pushing prices up are, as we’ve seen, gas infrastructure issues. Now, at the moment, the system seems well supplied but we have got some remaining winter months and, if the gas infrastructure is affected adversely, as we’ve seen with the Groningen gas field, then that will certainly push short-term prices up.

Further out along the curve, then it may depend on things like whether the LNG deliveries, that are currently all being directed to the Far East, will return back to the UK, that will certainly help offset price increases but if demand remains high, overseas, then that will have an adverse effect.

Oil prices, certainly, have been increasing over the past three or four months now consistently. If that continues it will definitely affect the curve further out, however, there is speculation that if the price continues then the need for the production caps that have been put in place, will disappear, oil production will increase and that will probably offset any further rises in oil particularly in the US where US shale oil has traditionally had a big impact as the price rises and they start to increase output.

The strength of the pound remains a key factor. At the moment it has rallied and that’s had an offset on some of the price increases that we’ve seen if that continues then that will be a good thing for keeping prices down. However, poor Brexit negotiation that weakens the pound is only going to exacerbate the price of energy here in the UK as traders in Euros speculate on our markets.

Overall the, it’s always difficult to anticipate that prices aren’t going to do anything other than, in the balance, increase as fundamental demand for oil and coal increases if the economy grows on a worldwide basis. However, there are rooms for confidence that maybe some of this will be offset. The cost of renewable energy has been seen to fall significantly over the past year. This is a good thing and, whilst, obviously intermittent supplies aren’t the complete solution to all our needs, increasing our ability to use that energy and balance it maybe even using battery storage facilities, will eventually start to play its part in helping secure supply in the future and hopefully help balance the network in order to avoid some of the price spike and volatility we see.

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