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Market View: Volatility Returns To UK Energy Markets

Matthew Osborne, Principal Risk Manager at Inenco Group

Over the last few weeks, UK gas and power markets have seen significant increases. Near term energy contracts have increased by around 25% in the last three weeks: day ahead gas rose to 47.95p/th last week, the highest in 18 months, and Q1’17 baseload power has increased by over 40% since September. Imbalance prices have also rocketed, rising as high as £800/MWh earlier in the month. The main cause for this volatility is concerns over supply issues. Inenco’s principal risk manager Matt Osborne explains:

Nuclear offline: Whilst National Grid’s recent winter outlook confirmed that security of supply won’t be an issue for the coming months, concerns over tight electricity supply margins this winter prevail. This has been magnified by significant exports to France to cover nuclear outages, adding further risk premium to forward power prices. The return date of many of these nuclear sites currently offline remains unknown or have been extended: the risk that more will be taken offline whilst our export capacity is physically limited at current levels has added significant bullish sentiment to the market.

LNG lacking: Lower LNG cargoes during Q4 have also affected prices. Whilst this was expected, the reason for their absence has changed from maintenance to increased Asian demand. This has had a bullish effect on the market, as the impact could roll into Q1 2017.

Reduction at Rough: The Rough gas storage facility has also been operating at reduced levels in recent months. The facility has not been operational at all during October, but the plan to bring it back online on the 1st November may provide bearish impetus to the market.

Brexit bearing: The weakening of Sterling has been a major driver on prices. Whilst there has been some retracement, a trend has not been established and there is still significant uncertainty related to Brexit and its consequences.

Oil rebounds: A possible OPEC agreement to cut oil production and the strength of the Dollar have added further bullish sentiment to the market, with the price of Brent crude oil trading back to around the key $50/bbl level  in recent weeks.

Coal: Coal prices are also in an uptrend – supplies have dwindled and buyers have scrambled to find cargoes in the spot market, largely due to production curbs in China where the government is restricting the number of working days at domestic coal mines to 276 a year, down from 330. Its impact has been magnified by a string of production disruptions in Australia.

What action should businesses take?

For those on fixed price contracts, it would be wise to considering protecting your position if you are still below budget for next year.

If you have a flexible contract, consider deleveraging slightly, particularly given the mounting risks in the market which may be compounded if we get a cold snap in February/March.

Inenco produces a weekly energy market update – the Y? Report – giving the latest update on what is driving the market and action businesses could take to optimise their energy positions. Inenco customers can also check their online portal for daily market reports and special commentary and analysis.

To speak to an Inenco expert about your position and how to manage market volatility, contact us today on 08451 46 36 26.