Here we take a detailed look at the current internationaland UK market drivers. These are the factors that willdictate the trading opportunities in 2024 and ultimatelythe cost of energy over the next 12 months.
Uncertainty and volatility are always present inthe energy market. This means it is importantto stay informed about what could affect yourenergy budget as more information drivessmarter decisions.
Have Wholesale Energy Prices “sprung”from their lows?
This winter was very mild and wet. We saw higher temperatures as well as above-averagewind speeds, which in turn has led to a reduction in heating demand, whilst the increased windgeneration has meant a drop in gas consumption from gas-fired power plants. This was a welcomefactor that’s helped ease overall prices.
We are now seeing gas and power prices return to pre-Russian invasion levels. That’s the secondwinter running since the Russian invasion of Ukraine that prices have declined. Not many would haveforecast the price reduction of Win-23 that we have experienced, given several respectedcommentators speculated that pricing would remain at higher levels in the long term.
When looking at the future prices, until the start of 2024 we were seeing ‘backwardation’, where thefuture seasons were priced lower than the near-term seasons. However, this has somewhat changedwith the front season dropping below the subsequent four seasons, although this reversed again inthe middle of March. That said, looking at the summer and winter seasons, the front five seasons areall priced very closely, and their prices have slowly converged since the extreme highs weexperienced during the summer of 2022.
We have seen similar trends for both summer and winter seasons. 2026-2028 season projectionshave been relatively rangebound since late 2022, whereas 2024-2025 seasons have experiencedmore prominent drops.
Long-Term Gas Trend
Short-Term Gas Trend
With only a few more weeks of the heating season left, Europe is on course to end the winter witha record amount of gas storage, helping to send prices lower, whilst removing doubts aboutenergy security.
From the current European storage levels (shown below), we can observe that stock levels arevery healthy - especially when compared to previous years at the same point in time - at around58% of capacity.
Report of low 2024 gas prices
Will they continue to decline, level out or rise?
It has been reported that European gas and power prices are forecast to fall this summer, with inventoriesstarting the season at over half-full due to mild Win-23 temperatures. We also expect a higher drop ingas-fired generation this summer, easing pressure on the gas price.
Although demand is lower over the summer months, allowing for planned outages during whichmaintenance works take place, we still need to keep an eye on negative market drivers. In early Jun-23,there was an unplanned outage in Norway which saw gas prices rocket. The effect led to a summer ofrangebound prices, not really breaking out of this until late Sep-23. This highlights the often-precariousnature of the markets and how certain events can adversely affect market prices where they can remainhigh, rather than quickly re-tracing the gains.
Given the significant downsides, the outlook for this summer has been described by some as bearish,however, it is evident that serious geo-political risks remain.
Global Oil
Global oil prices have remained relatively rangebound at between $75 and $86.5/bbl. This isdespite the war in Eastern Europe and the conflict in the Middle East. "A remarkable thing is the(price) stability, given the geopolitical turmoil," said Daniel Yergin, vice chairman of conferenceorganizer S&P Global and a Pulitzer Prize-winning author on global energy.
At the annual CERAWeek conference, unlike past conferences where conversationswere dominated by market-share battles between U.S. shale oil producers and theOrganization of the Petroleum Exporting Countries, talk of price wars has beensupplanted by energy security issues, Yergin said.
"When demand was down and prices were down, it was very easy to seea way towards energy transition, but with Russia/Ukraine (war) and priceshocks, energy security is back on the table," Yergin added.
Additionally, and related to oil prices, strikes on Russian refineriesadded a risk premium to crude along with further strikes andextended OPEC+ output cuts. This led Morgan Stanley to raiseits Brent oil price forecasts by $10/bbl to $90/bbl for the thirdquarter of 2024.
World Events
It would be remiss of us to ignore the continuing geopolitical events in the world. They still loomlarge, with the ever-present concern that one significant incident in these conflicts would seeglobal markets climb. The attacks in the Red Sea by the Houthis continue, targeting internationalcommercial shipping, which has been occurring since mid-November, disrupting global shipping.This has forced firms to take longer and more expensive journeys around southern Africa.
Even with these events, markets have fallen, given the healthy state of the fundamentals. However,we should also exercise caution and an awareness of what could happen at any moment which mayadversely impact wholesale market prices. If other fringe players were to join the fray, it could furtherheighten or inflame tensions, which would be seen as detrimental.
We would reiterate our previous cautionary advice. Whilst market fundamentals such as healthystorage levels, the upcoming end of the heating season, warmer weather and healthy imports are allproviding bearish sentiment, the continuing proactivity around our customer energy procurement isstill key
Many of our blue-chip clients with substantive energy spends have continued to opt to fix out for afurther 24-36 months in recent times or have been utilising the flexible procurement product andtaking advantage of those volumes to purchase when the market drops, even locking in some of thefuture low prices, up to 36 months out.
Would you be happy to lock in a long-term contract now at these comparative lows, takingadvantage of the attractive prices before markets potentially tick back upwards?
Additionally, would you be happy to look at flexible procurement, allowing AdvantageUtilities to purchase your wholesale energy as the market falls, taking advantage ofthese ever-dropping prices we are seeing that are impacting the next few years?Should markets continue to drop, we will continue to purchase additional volumes,which will lower your overall p/kWh monthly prices.
Winter Dial Down
Advantage Utilities was delighted to once again help facilitate the recent national Winter Dial Downscheme. The initiative, aimed at alleviating pressure on the grid during periods of high demand and/or lowgeneration, helps to reduce reliance on fossil fuels whilst financially incentivising consumers to reducetheir energy usage. Any eligible and pre-registered clients can expect to be contacted regardin paymentsdue to them later this month. There is talk that the success of the project has led to a similar scheme beingconsidered in the gas market ahead of Winter-24. Naturally, we will keep clients informed and flag up anyopportunities as and when they may arise.
How can advantage help?
Our sustainability department continues to offer an everincreasing range of products and technology aimed at reducingenergy consumption and associated costs as well as drivingdown carbon emissions. We will of course continue to keep youupdated about these initiatives, but please do reach out to yourdesignated point of contact should you wish to explore youroptions in this regard.
In terms of procurement, we will continue to monitor marketswith a view to helping customers navigate the unprecedentedcircumstances and ascertain when constitutes the best timeto seek a contract extension.
Our popular flexible procurement options continue to bean option for an increasing number of clients on eithera standalone basis or as part of a grouped basket.This often facilitates access to day/month aheadtrading markets which have proved to beparticularly beneficial to many clients over thewinter period.
.png)
