In this new series of articles, Dominic Whittome covers wholesale energy prices between March and May 2016, discussing issues such as fluctuations in the price of Brent crude, falling shale production and decreasing prices across Europe’s gas and electricity exchanges, as well as the possibility of these rising again in the future.
Despite remaining pretty much flat over April, gas prices jumped 8 p/th in the second half of last month, closing the two month review period more than 16% higher.
The spot market had been buoyed by a series of supply concerns in the Norwegian and Danish sectors of the North Sea and a rising oil price. However, the announcements of various gas exporting projects in the Indian Ocean, North Atlantic and Middle East, all within a fortnight of one another, helped to limit the final gains in the market.
On the demand side, perhaps the outlook for prices is more bullish. The market share of gas in the UK’s power generation mix has continued rising of late, the daily quotient regularly passing 45% this year. Although renewable capacity now amounts to 27% (peak), the sporadic nature of solar and wind will require ever greater volumes of flexible CCGT capacity.
So in the longer term, UK gas demand could be driven higher by CCGT demand. There is a holding pattern of projects waiting to come online, whose flexibility is required to help the grid to balance and offset losses in coal-fired generation. For coal, the picture on the Continent also looks bleak (Germany aside) with Belgium becoming the latest European country to stop burning this fuel altogether last month.
One factor which could support forward gas prices is a sustained recovery in the crude market. Given the six to nine month indexation lag in all the major long-term sales agreements for gas into Europe, last year’s low oil prices have already had as most of the effect they are likely to have.
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Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.
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