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.
Current Market Overview
Current storage levels across Europe are strong as we enter summer, and are expected to meet the winter target early, similar to last year. Historically,summer months see lower prices.
However, several bullish factors could drive prices up, including potential conflicts involving Russia, Ukraine, the Middle East, and China, along with low wind, LNG supplies, and unplanned outages. These threats necessitate risk mitigation through hedging, especially given the current market backwardation. The chart below shows the market's decline since last summer.
Although there has been a slight upward trend recently, the market remains range-bound. We should leverage the current lower pricescompared to the highs of last year and 2022.
If the polls are to be believed, on 5th July the UK will have a new government with new policies. How will these affect the energy prices? Well, as it is forecast to be a landslide election, we consider these price movements to have been already factored in. We will monitor policy and any role the future GB Energy plays and report on it in due course.
So, can we expect to see prices reversing the recent trend?
Backwardation
As in much of 2023, the markets are experiencing backwardation, with spot prices higher than future prices, especially for 2026-2028.
This trend is also evident in the seasonal(winter and summer) markets, where future seasons are trading lower than the upcoming ones. Given the relatively low future prices, it is prudent to hedge some future volume now, considering potential geopolitical risks that could drive prices up. This strategy locks in lower prices and mitigates the impact of future price spikes due to the weighted average price.
The charts below illustrate how future winter and summer gas seasons (2024-2028) are significantly cheaper, with a less steep upward trajectory compared to nearer terms, which are more influenced by short-term drivers.
The same is true for the power seasons.
OPEC+ and Oil Markets Review
Since mid-December, oil prices have increased by approximately 20% until early April. Contributing factors include attacks by Russia and Ukraine on each other's energy facilities and attacks on supply ships in the Red Sea.
The trend over the past year shows rising prices driven by OPEC+ supply cuts, increased demand in China, and U.S. inflation data. Early
October saw another price jump due to regional concerns following events involving Hamas on October 7th, impacting oil production and shipping. Prices fell back in November but have been rising since mid-December.
Since April, oil prices have declined due to scepticism over OPEC+'s decision to increase supply later this year amidst weakening demand. However, prices have risen since early June due to forecasts of strong global oil demand growth in 2024.
Market jitters around the Middle East conflict also influenced prices. Israeli tanks advancing into Gaza and warnings of a potential "all-out war" with Lebanon'sHezbollah have heightened concerns about supply disruptions from this key oil-producing region. An escalation could significantly impact global oil supplies.
Global LNG - Asis
A close eye should be kept on Asian demand as extreme temperatures across Asia are driving up LNG demand in the region, with imports in South Asia hitting records.
This could tighten available supply and further lift Asian spot LNG-AS prices that have already gained a third since April, with heatwaves across South and Southeast Asia boosting air-conditioner use and other cooling demand. Prices are now at a near six-month peak.
"Spot prices are now driven by Asian demand. Temperatures in South Asia are rising due to a heatwave, increasing power demand," said Siamak Adibi, principal consultant at energy consultancy FGE.
While China may still see lower demand compared with its record breaking shipments in 2021, demand from India and the rest of Asia has compensated for any drop-off, Adibi said.
Parts of South and Southeast Asia saw extreme heat and record temperatures in April and May, increasing electricity consumption for cooling and straining power supplies.
South Asian LNG imports rose nearly 20% from a year earlier to 3.8 million metric tons in May, according to analytics firm Kpler. India also saw its highest import levels recorded for May at 2.4 million tons, while Bangladesh LNG volumes hit an all-time monthly record at 0.6 million tons, according to Kepler data.
Rising demand for cooling is set to continue as Northeast Asia enters its summer. Japan's meteorological agency forecast likely higher-than-average temperatures from June to August, and China's energy regulator warned power supply will be tight in some regions for the next few months amid growing consumption.
"Various weather forecasts suggest Northeast Asia may experience hotter-than-normal weather from May," said Energy Aspects analyst Min Na in a note, adding that restocking demand for LNG in Asia will be higher year-on-year this summer.
Japan government data showed LNG stockpiles by utilities at 2.06 million tons as of May 26, below the five-year average for the period, as Tokyo is already experiencing hot weather.
With greater demand in Asia and subsequent higher LNG imports, it takes away the supply side from Europe.
Ongoing Chinese and Russian Inflamatory Actions
Heightened tensions due to China's actions towards Taiwan and its conflict with the Philippines could impact global markets. Taiwan, a key semiconductor producer, faces potential military actions that might trigger a technological crisis and global economic downturn, affecting energy prices.
China's regional conflicts need close monitoring. In the Russia-Ukraine war, Putin's mutual defence agreement with North Korea and warnings to South Korea escalated tensions. Russia also blames the U.S. for a Ukraine missile strike on Sevastopol. These conflicts could significantly impact global energy markets if they intensify without intervention.
Britain's System Operator Confident of Electricity Supply this Winter
LONDON, June 6 (Reuters) - Britain's Electricity System Operator (ESO) expects sufficient supplies this winter, boosted by a new power link with Denmark, new gas-fired power plants, and more batteries.
"Our initial assessment indicates sufficient margin throughout the winter," said Kayte O'Neill, ESO's chief operating officer.
Despite signs of stability in global energy markets, uncertainties persist. ESO remains vigilant, monitoring potential risks and working closely with partners to ensure resilience and necessary actions.
P432: Mandatory Half Hourly Settlement (MHHs)
Elexon, a not-for-profit organisation, funded by electricity market participants and responsible for balancing the grid, has introduced some new legislation, P432. This is usually referred to as Mandatory Half Hourly Settlement (MHHS).
In simple terms, this will involve mandating suppliers to introduce half-hourly settlement across all meter types by 2026.
Please see our recently published posting for further details:
https://www.advantageutilities.com/understanding-p432-half-hourly-settlement
Energy Management
MHHS will facilitate more granular data in some cases, but regardless, this a reminder that as an AdvantageUtilities client, you can already benefit from the following platforms which can help give you invaluable insight into your energy provisions:
- Advantage Analytics - This gives you access to tailored, detailed insights into your energy usage and carbon emissions, providing you the data to base energy management strategies on.
- Advantage Forensics - Bureau and bill validation, providing analytics whilst ensuring you don't overpay due to supplier errors.
- Energy Services feasibility studies and benefit analysis -Providing insight into how reduced grid reliance can benefit your bottom line as well as enhance your environmental credentials.
- Non-energy cost evaluations - Reviewing current costs for your area, whilst speculating on future trends and identifying any opportunity for reduction.
- Various bespoke reports- As a client-centric consultant, with access to a multitude of data sources, we're determined to deliver what you need.
** All reports are subject to various factors including, but not limited to, meter compatibility, dataaccess and supplier cooperation.
All of these features of our offering serve to provide you with peace of mind and invaluable insight into your energy and gas consumption. But we don't stop there. We can help you utilise the data to derive positive change, therefore, whether you require a mapped-out carbon reduction journey, an environmental policy, staff behavioural training around carbon reduction, an energy management strategy or the implementation of various technologies, we will be with you every step of the way.
How can Advantage Utilities can help?
Our sustainability department continues to offer an ever increasing range of products and technology aimed at reducing energy consumption and associated costs as well as driving down carbon emissions. We will of course continue to keep you updated about these initiatives, but please do reach out to your designated point of contact should you wish to explore your options in this regard.
In terms of procurement, we will continue to monitor markets with a view to helping customers navigate the unprecedented circumstances and ascertain when constitutes the best time to seek a contract extension.
Our popular flexible procurement options continue to be an option for an increasing number of clients on either a standalone basis or as part of a grouped basket.
This often facilitates access to day/month ahead trading markets which have proved to be particularly beneficial to many clients over the winter period.
.png)
