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The energy market challenge – the story continues…

5th January 2022

The apocryphal “Chinese Curse” of “May you live in interesting times” has certainly applied to the energy market in recent months.

Many will be glad to have seen the back of 2021 and none more so than those charged with managing an organisation’s energy supply and associated budget. The significant fall in wholesale prices in recent days is of course good news but on the back of a further price hike in December, it also goes to illustrate continuing market volatility. For those returning to work after the Christmas break – perhaps the next decisions just got that bit more complicated?

A glimmer of hope?

After further dramatic rises earlier in December, UK wholesale gas prices have fallen back again in recent days, a big driver of this being an increase in LNG deliveries to Europe as Asian demand for LNG lessened. Indeed, UK natural gas forwards more than halved between mid-December and early January as more than 30 American LNG shipments arrived in Europe, alleviating supply concerns in the short-term. The seasonally milder weather and the apparent easing of speculative activity has also helped.

So, should you take advantage and buy at the current lower prices – albeit still significantly higher than at the norm of recent years or even sell your current position in the hope of further falls? The simple answer is that there is rarely a simple answer and that the right strategy needs to be aligned to the overall strategic drivers of the organisation.

However, the current bear market may only be short-lived. While the shipments provide welcome additional supply, they don’t resolve the underlying issues that has trimmed gas supply into Europe since September.

The Russian dimension

Much of the Russian gas supply that Europe has become dependent on still isn’t flowing as quickly had been expected. Despite Russian state-owned gas giant Gazprom increasing total exports in 2021, it missed its previously set export targets to Europe. Much of their export increase instead went via the relatively new pipeline into China, established in 2019.

Many analysts have closely monitored Russian gas flows into Western Europe, suspecting that the Kremlin is deliberately trimming supply in an attempt to push through their controversial Nord Stream 2 project. Gazprom itself has already warned that it expects high wholesale gas prices to continue for Western Europe, including the UK, until at least 2023.

Doing nothing is not an option

Some stability should return to the market after then, but for businesses already under financial pressure due to energy costs, they face a long wait.

Looking at unprecedented increases in energy costs, simply waiting and hoping for the best isn’t viable.

Businesses facing a major increase in their overheads as energy bills climb will face a nervous wait for prices to stabilise and will need to take proactive steps to limit their further exposure. It can seem a complicated challenge but in essence two key principles will help navigate the year ahead. Having a proactive risk management and procurement strategy will always be the better option. And the cheapest and greenest energy is always that which you don’t use – so optimising consumption has never been more important.

Working in energy management certainly shows no signs of being dull in 2022.