Over the whole week energy prices ended down across the whole of the curve. This was mainly driven by an oversupply of gas and towards the beginning of the week a very strong pound. There was a recovery in prices in the middle of the week. This was on the back of the pound weakening, but also possibly some concerns about the request to stop production from the Groningen Dutch gas field due to concerns about seismic activity in the area.
In the short term we might expect prices to remain relatively soft. There’s been a benign forecast for temperatures for the rest of January and February. However, of course the impact of currency rates could always distort that. Interestingly, energy prices largely ignored the oil price this week. Oil prices rose, particularly at the beginning of the week as we began to see the curtailments of production, particularly by the Saudis.
Looking forward, we might like to keep our eye on the delivery of LNG into the UK. This year it is forecast that LNG production will increase and the amount that finds its way into the UK could well depend on how much is taken up by south east Asia. Last year south east Asia absorbed all the surplus, but the expectation is that more LNG will find its way into Europe in the summer time, which would have a downward impact on energy prices. Of course, in the long term it’s very difficult to predict what will happen with energy prices. However, there are a number of indications that would suggest that energy prices will indeed be very volatile over the next few years.
Factors contributing to that volatility will be whether or not the oil producing nations can continue to deliver a reduction in oil output, which should drive oil prices up and therefore should have an impact on energy prices. There’s also a lot of political instability. We’re all aware of Brexit and the US presidential elections, but this year we’ll see elections in a number of key European states. All in all, this points to a potentially very volatile energy price situation going forward. On that basis, customers might be minded to think of a number of things, one, to enter into longer term deals, that way mitigating the risk of price volatility going forward, and at the moment there is a degree of value in longer term deals because the energy price actually reduces the further out you go along the curve and you can get quite good deals on longer term contracts. The other option is to consider flexible contracts where the customer has the choice when to buy elements of their energy and therefore spread the timing of their purchasing decisions.
Finally, a quick word about P272 affected customers. Many of you will be aware that P272 is a programme to convert certain non half hourly metres to half hourly metering. Different suppliers have different approaches to how they will do this, so it is very important that if you are going to tender you make sure you understand exactly what is built into the costs that you’re getting from a supplier, when they intend to convert the metre to half hourly and whether or not that will impact prices during the lifetime of the contract.
If you’re interested in finding out more, please contact Auditel for a no obligation Strategic Cost Review