Energy Report 2017
UK energy markets responded throughout 2017 to unfolding structural changes in national and international supply dynamics.
A cold snap in early February in Europe saw spot prices briefly breach 60p/th, the highest levels in three years as UK and European gas storage levels began to look thin and Asian buyers dominated in the global spot LNG market.
Prices bottomed out in late June during the planned IUK interconnector maintenance shut, after which persistently high levels of export were seen from the UK to the continent during the remainder of the summer season, as gas that would traditionally have gone to replenishing storage facilities was instead exported.
This was driven by the announcement that the UK’s largest storage facility, Rough, was to permanently cease injection operations, the stockpiling of gas during the lower demand summer period, for extraction during the higher demand winter season. In turn, this has meant that the UK has become more reliant on imported gas to meet winter demand, most notably to date through pipeline imports from Norway and across the interconnectors from Europe.
Gas and power prices were persistently bullish through 2H 17 due to a combination of strength in the price of European coal, which is an alternative fuel for power generation, an extension of the OPEC and Russian oil production cut deal which has been effective in strengthening global crude prices, and question marks around the levels of LNG likely to be delivered to northwest Europe through winter, as well as a series of unplanned outages at production and processing facilities affecting Norwegian exports to the UK & Europe.
UK power prices saw some strength in later summer/early winter as questions were again raised regarding French nuclear power production, where unplanned outages in the previous winter had combined with a partial outage on the UK-France interconnector delivered high prices and volatility. Those concerns did not materialise this winter however and risk premium traded out of the market, helped also by the introduction of the capacity market.
Prices peaked during a cold snap in December during a perfect storm of an unplanned outage on the Forties pipeline system in the north sea which affected domestic production, another unplanned outage at Norway’s giant Troll production field, and the highest daily UK demand levels of the year. Intra-day trade on the day saw spot gas change hands at higher than 90p/th.
The global LNG market continued to mature though Asian buyers dominate. Chinese demand rose 40% on 2016 to pass Korea as the world’s second biggest buyer, helping to push spot LNG prices to their highest levels in several years. New supply entered the market from Russia at the end of the year, as the Siberian Yamal LNG project exported its first shipments – one of which arrived in the UK but was subsequently exported.
The market has traded down in 2018 to date as late winter temperature forecasts across winter have indicated an expectation of warmer than normal temperatures, which gives traders more confidence on the ability of European stocks to meet late winter demand.
Looking ahead to 2018, the interdependent supply dynamic is expected to continue, and a return to wider winter-summer seasonal price spreads which had declined in recent years, is possible.
ICE, Bloomberg, Heren, WSI, Reuters