Here we take a detailed look at the current international and UK market drivers. These are the factors that will dictate the trading opportunities in 2024 and ultimately the cost of energy over the next 12 months.
Uncertainty and volatility are always present inthe energy market. This means it is important to stay informed about what could affect your energy budget as more information drives smarter decisions.
Current Market Overview
In recent months, the market has been caught in a tug-of-war between market fundamentals and geopolitical events. Whilst the main market fundamentals have been bearish overall, the geopolitical events centring around the Russia/Ukraine and Middle East conflicts have lifted prices.
European storage levels again hit their required 90% fullness level towards the latter part of August, two months earlier than the 1st November target, just as they did in 2023. This highlights the EU’s readiness for the coming winter. The EU will continue to monitor the situation so that gas storage levels remain sufficiently high over the coming months.
Geopolitical events have aided the increase in market prices recently, with escalations in the two major conflicts having created fear and concern around the impact on supplies. Wholesale prices, despite climbing since late February, have not reached the same levels that we saw during the same time last year. In recent weeks, the market has taken a slight downward turn, even with the ongoing summer maintenance outages. There appears to be the potential for a downturn in the market, given the lows we saw earlier this year, even with ongoing geopolitical factors present.
The chart below shows that despite a recent increase in wholesale prices since our last report, the markets have once again moved back down to a level comparable to late June when we produced our previous report. Given the turbulent events of late, the markets haven’t experienced the surge we saw in 2022—definitely a positive factor.
Escalation of Two Key Conflicts
What's Looming? Impact on Energy Security and Prices
There is noticeable volatility in global events. Recent developments include escalating tensions in Lebanon, missile strikes from Yemen into central Israel, frequent references to nuclear conflict involving Russia and NATO, and heightened tensions between China and the U.S. in the Pacific.
Over recent months we have seen an escalation in events with the two major world conflicts – Russia/Ukraine and the Middle East. There appears to be no imminent prospect of a ceasefire or end to the Russian invasion of Ukraine. This will therefore remain a concern for markets, especially given the importance of the gas and oil from the regions.
The Russia/ Ukraine conflict has seen both sides hitting energy infrastructure and assets, leading to wholesale price rises. In August, there were fears of a possible Russian gas flow disruption via Ukraine in the Kursk region, this is where the pipeline carrying gas enters Ukraine for further export to Europe.
Regarding the Middle East, heightened tensions and conflict between Israel and Iran have led to energy markets becoming concerned about the potential risk to oil supplies from the region, particularly Iran and Africa, should the situation escalate further.
Two years ago, we noted the rising market prices that followed Russia's invasion of Ukraine and questioned whether there was 'light at the end of the tunnel'. Today, that question remains relevant as two other major conflicts have shown signs of escalating, posing new risks to global markets and consumers. The potential for further instability could have far-reaching economic repercussions.
With winter approaching, a milder season could help suppress energy prices by reducing demand. Conversely, if prices rise, we may see consumers becoming more cautious and disciplined in their energy consumption.
Two years ago, we noted ‘what goes up, must come down’, a sentiment that holds for the wholesale market. Prices have increased marginally in recent months but remain far below the peaks of 2022. We believe that further market declines are possible, suggesting that flexible procurement strategies could be advantageous. These strategies allow for taking advantage of potential market dips while mitigating the risk premiums tied to traditional fixed-price contracts.
How are we responding to the increasing frequency of concerning geopolitical events? What would be the potential impact on our energy security and pricing if one or more of these situations escalate into a regional conflict involving NATO?
Given the locations of these conflicts and the energy reserves of the countries involved, any significant escalation could lead to a substantial increase in prices. Markets tend to react negatively in such situations, especially regarding physical commodities like energy, which would face supply disruptions.
Mitigation Strategies for Potential Inflationary Energy Prices
As energy prices continue to rise, focusing on both cost reduction and consumption is key. At Advantage Utilities, we help businesses not only procure energy efficiently but also reduce overall consumption through innovative solutions.
Key strategies include:
- Onsite Generation: Solar PV, wind turbines, and combined heat and power systems reduce grid dependency and lower costs, with ROI now under five years due to current electricity rates.
- Efficiency Enhancements: Implementing voltage power optimisation, LED lighting, and smart HVAC systems can significantly cut energy use. Building fabric upgrades, such as improved insulation, further drive down consumption.
- Transport and Backup Solutions: Integrating EV charging infrastructure and battery energy storage systems lowers fuel costs and enhances energy resilience.
By focusing on these measures, we help our clients minimise both energy costs and usage, delivering immediate savings while supporting long-term sustainability goals. Let us work with you to reduce your energy footprint and shield your business from inflationary pressures.
At Advantage Utilities, we have expanded our in-house expertise and developed a strong and trusted network of design and installation experts. We have been working with clients to assess the suitability of all technologies, outline their economic and environmental benefits, and facilitate their installation.
Maintenance Period
Impact on Final Days of Winter 2024 Trading
This year’s maintenance period began in earnest at the end of August and significantly ramped up throughout September, resulting in minimal gas flows from Norway to the UK. While this may not directly influence Q4-24 energy markets, it has been a notable factor affecting Winter-24 wholesale prices.
As we pointed out last year, summer maintenance is scheduled during times of lower seasonal demand to reduce its impact on pricing. If such maintenance took place during winter, when demand is much higher and gas supplies are more critical, the effect on prices would be far more severe.
However, recent months have seen a number of unplanned outages, contributing to upward movements in wholesale prices. This followed an unusual downward trend last winter, extending into late February, a time when we had hoped for at least stable pricing. These events highlight the importance of strategic, regular hedging to protect against sudden price surges.
While the outcome for Winter-24 remains uncertain, current prices are historically high, so it would be prudent to secure your energy needs in advance. Doing so can help mitigate exposure to price volatility driven by supply disruptions, sudden surges in demand, or geopolitical events. The recent impact of summer maintenance on pricing is a clear reminder of the importance of proactive planning.
Hedging and Flexible Trading
Continuation of Low Future Prices
Even though the markets have moved upward in recent months, the severity has not been the same as what was witnessed in 2022. Nor has the increase been as steep for the compared future seasons. We have previously discussed the concept of backwardation, whereby the future prices are lower than the near-term prices. This still exists and because of it, the opportunity to extend your contracts or opt for flexible procurement into these future years is still an attractive proposition. This remains prevalent for the coming seasons, 2026-2028 in particular.
By looking to the longer term, we can help you hedge some of your future energy at these relatively low prices, mitigating some of the risks associated with geopolitical factors. Unlike fixed contracts, where everything is hedged on day one, flexible contracts allow you to monitor the market and procure in tranches at opportune moments. This way, if the markets fall further, you can hedge some of your volume at these lower prices, rather than committing everything at a potentially higher price all at once.
Global Economic Indicators
We need to keep a close eye on the global economy as well as the effects that the U.S. elections in November could have on financial matters. Should we witness a slowdown in the economy, this would lead to a reduction in demand for energy, which in turn would lead to lower prices. Of course, there’s always the flip side, where energy prices could rise if the economy bounces back.
If interest rates are cut, this could help ease economic growth. The UK recently cut its rates, but we need to see what other countries do, particularly in the Asian markets. If their economies start to grow, this could lead to an increase in demand, which in turn would create competition with Europe for energy supplies. Presently, demand in China remains low, as does its oil refinery output.
On the 18th of September, the U.S. cut its interest rates in an attempt to stimulate economic growth. However, this can take time for its effect to materialise. Some see an interest rate cut as a sign of a weak U.S. labour market though. Will the UK follow suit next month in further reducing their interest rates?
How can advantage 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.
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