UK Gas and Power Review
Weekly Energy Market Review Week 40: It was another bearish week as extant drivers continued to push contracts across the curve lower.
A bad week in financial markets contributed as disappointing data pointed to a further slowdown in global manufacturing.
Supply was robust despite a couple of cooler days that saw domestic demand at a five-month high.
Falls averaged around 3.5% on products out 12 months.
Oil supply risk weakened as Saudi Arabian oil output restored to full capacity, Middle Eastern geopolitical risk diminished on reports of a potential peace deal in Yemen, and economic concerns saw crude at its worst week this year at a six-week low.
The coal slump continues, along record ARA stocks, weak demand, and Chinese import slowdown.
Carbon hit €25 on global slowdown, soft oil, technicals, strong renewables, and Brexit concerns.
UK Supply and Demand Dynamics
LNG send out continue to rise, up 60% on the week and at levels last observed in May.
The flurry of cargoes en route ensures send out will have to continue to accommodate these arrivals.
Langeled flows continue to fluctuate as Equinor’s commercial reductions ensure flow uncertainty in the current low-price environment.
Wind speeds, although slightly lower week-on-week, were still providing nearly 20% of our power needs, peaking at 40% as storm Lorenzo brushed Ireland.
Nuclear generation levels remain close to yearly highs after a maintenance-affected year.
We should see this continue.
The latest weather models revised higher, with still no major cold spells on the horizon.
Leading European Gas and Power Markets
Downside continuation in carbon and coal pressured power calendars contracts lower for the second week in a row, dragging French Cal-20 to a four-month low.
Nuclear regulators ASN provided EDF with two weeks to respond to demands regarding six of its reactors.
Strong wind generation and negative German manufacturing data weighed.
Rising LNG arrival rate into North West Europe continues to underpin price weakness as do brimming storages and strong imports into Europe from Russia and a ramp up in North African exports.
Wider global recession fears, increasing renewable growth, and falling oil prices weighed further.
The latest forecasts see temperatures remaining above seasonal norm.
Weekly Energy Market Review Week 40 – Outlook
Last week’s outlook saw more downside ahead with geopolitics and ASN an upside concern.
It is more of the same this week.
Further disappointment in financial markets can see commodities drifting lower.
Storages are full across Europe, and the weather is still not conducive for a prolonged spell of elevated domestic heating demand.
Technical analysis sees some contracts approaching overbought levels, which can slightly negate the bears, but fundamentally, this market is bearish.
Last week, Eurozone factory growth was at a 7-year low, and German PMI was at 2008 levels.
The WTO downgraded global growth forecasts for 2019 and 2020, while UK construction is on its second fastest decline in 10 years.
The USA ISM sent global markets to their worst day this year, and the FTSE 100 lost £96bn over the week.
Things are still looking bleak for Atlantic and Pacific global coal markets, as demand remains weak.
ARA stocks are at record highs (30% higher YoY).
It’s similar in the Pacific Basin with perhaps only India really looking to import as monsoon season comes to an end.
A steel market downturn, slowing growth, and shipping rates at six-week lows added to woes.
Milder weather, strong wind generation, continuing pessimism around Brexit, and deteriorating economic conditions can offset potential bullishness.
Carbon is at a key technical level (50% fib), while several contracts are at multi-month lows, which could see some increasing buying activity.
The LNG market is now oversupplied.
The total number of projects sanctioned in 2019 totals 63 MTPA.
Demand has stagnated, which, as per gas markets, sees storages brimming in Asia and Europe.
The Asian price is 50% lower than October 2018 and not high enough to dissuade producers from flooding North West Europe.
Global macro environment dominates sentiment.
Damage from US tariffs is coming to the fore, and the crude price reflects that.
Brent had its worst week of the year, and trade talk resolution for 2019 is not looking likely.
Further OPEC production cuts are looking increasingly likely as the price continues to slide.
EDF Highlights Potential for Business Energy Efficiency
EDF Energy has claimed that the average UK business could save more than £46,000 per year on its energy costs by improving on its energy management practices.
While energy efficiency improvements have been a central feature of UK energy policymaking and awareness raising, most organisations have yet to implement some low-hanging fruit measures.
The energy supplier recently completed surveys of 4,150 sites, across multiple sectors and including schools, hospitals, hotels, offices, and public buildings.
EDF Energy’s recommendations to businesses include installing more efficient lighting and behaviour change options like improved heating controls.
Significant improvements in energy efficiency in businesses will contribute to the UK’s 2050 net-zero emissions target.
However, in another recent survey conducted by EDF Energy, nearly half of 502 businesses are aiming for carbon neutrality themselves before 2030.
The shorter timeframe in which to reach net-zero for businesses reinforces the importance of improving energy efficiency, starting with implementing the low-cost options that have been shown to be under-invested in.
Because net-zero targets permit the use of carbon offsetting, there is a danger that investing in negative emissions might take priority over emissions reductions to reach net-zero.
This causes structural issues (like low energy efficiency) and the exploitation of fossil fuels to persist.
By investing in emissions reductions, businesses can realise important spill over benefits related to their own use of improved technology.
By investing in negative emissions, businesses outsource their climate commitments.
The latter arrangement is unsustainable yet can still satisfy a net-zero target.
This problem has led to calls from policy researchers at Carbon Brief to recommend that net zero targets separately account for the contributions of negative emissions and emissions reductions in reaching net-zero emissions.
Exposing the problems with net-zero targets might encourage those who set them to clarify how they will be reached.
This current lack of clarity affects the UK government, and as shown by EDF’s research, UK businesses.
A starting point for businesses to invest in their own emissions reductions is to demonstrate the low-cost and high reward of improving their energy efficiency.
Weekly Energy Market Review Week 40