Here we take a detailed look at the current International and UKmarket drivers. These are the factors that will dictate the tradingopportunities in 2020 and ultimately the cost of energy over thenext 12 months.Uncertainty and volatility are always present in the energymarket.
This means it is important to be informed about whatcould affect your energy budget as we like to think that moreinformation drives smarter decisions.
Coronavirus Update
Since the last quarterly report, Covid-19 has developed into a global pandemic with confirmed global cases of the virus surpassing 10 million, accompanied by over half a million deaths. It has also heavily impacted the economy and global markets with many businesses around the country having to close their doors.
In recent weeks there have been promising reports of things returning to normal with the number of cases falling, fewer deaths and the relaxation of lockdown measures, seeing the hospitality sectorreopen from 4th July.
We have also seen some recovery in global markets since March based on hopes that governments are easing restrictions and demand returning to normal. However, we are not out of the woods yet. There are fears over a second wave of the virus spreading with some countries including China, USA, South Korea and Germany having to re-introduce lockdown measures.
Furthermore, we will see an inevitable recession; with the UK economy shrinking 20.4% in April alone, which is likely to slow recovery. The Bank of England has already warned that unemployment could increase steeply after government funded support packages come to an end.
Oil Market
Perhaps the most talked about and well-documented consequence coronavirus has had on energy markets has been the effect on the oil markets. Both the WTI and Brent Crude benchmarks have shrunk on two-thirds since January as a result of social distancing measures introduced by governments around the world to combat the spread of the virus. WTI also saw negative prices as storage sites filled up and demand was crushed.
However, we have seen oil prices and some support, with the highest oil prices since early March and prices gaining 7 out of the latest 8 weeks. This is on the back of production cuts from the OPEC+ group who finally came to an agreement and ended the oil price war that had ensued.
Prices have found stability around the $40/bbl mark in recent weeks. Perhaps this recovery in price is based more on speculation and news rather than market fundamentals as demand is still yet to return, but we are slowly seeing a steady increase in global consumption with countries like China gradually returning back to normal in terms of production. Despite this, fears of spikes in new coronavirus cases are weighing on prices; with reports Beijing are reintroducing lockdown measures and the US recording a 25% rise in new cases during the week ending 21st June 2020.
The speed at which global demand returns as well as the OPEC+ group response in terms of determining output is likely to dictate oil prices in the near future, with the US-Chinese trade deal and how that turns out likely to play a bigger role in affecting price in the coming months, as it did before the new year.
Energy Prices - power and gas
The UK and Europe have experienced record low gas and power price levels as discussed in the previous report. This was due to a very mild winter that meant gas storage sites remained near capacity, aided by cheap Asian LNG flooding the European market with large numbers of cargoes docking on European shores. Covid-19 being thrown into the mix has then wiped out consumption and further exacerbated the gap between supply and demand.
During this pandemic, power demand in the UK was 20% lower compared to this same time period during the previous 5 years. The story was the same for other European countries such as Italy and Spain who, despite the recent relaxation of lockdown rules, have yet to see demand return to normal levels. As a result of this, gas and power prices have been very suppressed, we even saw gas prices in Britain become the cheapest in the world falling below the U.S Henry Hub.
However, in the last couple of weeks there has been more hope about demand returning to normal in the coming months and power prices have strengthened as a result (as shown in the graph above). Gas prices on the other hand, have started uncoupling from power prices and have remained low despite power and other commodities such as oil recovering as seen on the graph above. LNG imports have fallen with less cargoes arriving in Europe and the UK, which should help lift prices somewhat, but the overriding bearish sentiment still remains with Europe’s gas storage expected to be full by the end ofthe summer and renewables showing strength with the sunniest May on record, meaning less demandfor CCGT burn to generate power.
Low prices still remain in the gas and power markets, with demand not fully recovered in theUK and Europe (still around 12-13% lower than this same time period during previous years).*It continues to be a favourable time to renew and secure your business energy contracts*
Energy Management
One positive to come out of the coronavirus pandemic is that the UK was coal-free for almost 68 days as the country produced electricity without fossil fuel for the longest time period since the Industrial Revolution. Coal has played less of a role in power generation with its UK generation share falling to 2% last year and it is expected to be phased out altogether by 2024. This has paved the way for renewables to be much more prominent as they have remained largely unaffected by the coronavirus.
In the last 3 months, renewables have made up almost 36% of the power generation mix, more than CCGT burn, which stood at roughly 33%. Evidently, this is a very tough and uncertain time for businesses up and down the country, but there are many different energy management options that can be beneficial for firms to reduce long-term overheads and costs thus providing security.
As solar and wind become more eminent in the UK, it provides an opportunity for businesses especially after this tough period, to get involved in solar power generation to deliver long-term savings with good returns on investment, as well as sourcing green and sustainable energy for your business.
With gas prices remaining at the low levels they are at and power recovering slightly, it would also make sense to consider generating power through Combined Heat and Power (CHP) units, which not only improve energy efficiency but also save on costs and reduce reliance on the grid giving you more protection from outages.
In addition to this, the EV charging sector has been growing rapidly and with National Grid predicting that there will up to 36 million electric vehicles on our roads by 2040, it could be an appropriate time to install EV charging to generate extra revenue, as well as attracting more customers in and future-proofing the business.
Summary
As demand continues to recover and prices start to increase, now would be a favourable time to look into securing energy contracts, before demand fully recovers and energy prices rise back to preCovid-19 levels. This will prevent rising prices and provide security for your business in this arduous time.
As the renewables sector keeps on growing and fuels like coal are phased out, it is also a good opportunity to look into our solar energy options for your business to become more sustainable, as well as look into the other energy management avenues such as CHP units, which can save a vast amount on your energy costs in the long term.
Should you have any questions or queries regarding energy contracts, products, energy management, water, waste, and telecoms then please do not hesitate to contact your account manager or a member of our team on 0207 371 5360.
We wish all of our clients and prospects a healthy and speedy return to normality during this difficult time and rest assured we are here to serve your accounts with business as usual.
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