In this article, Dominic Whittome covers recent changes to wholesale energy prices.


Despite the efforts of the US to almost brow-beat Saudi Arabia into increasing output, crude oil continued to march upwards and rose a further 9% amid open talk in trading circles of a possible three digit oil price at some point this winter, especially if crude or petroleum product inventories look like tightening further.

Paradoxically the latest intervention will have made the Saudis even less inclined to raise output, lest it reinforce the perception it is know-towing the US and working at odds with its cartel partners. There are other reasons why high prices (though below $100/bl) remain a policy goal for the kingdom, not least the delayed floatation of Aramco, for which a robust oil market remains essential.

There are also physical limits as to how much more oil it can produce. No OPEC oil producer should ever want its geo-politically priceless ‘swing capacity’ put to the test unless absolutely necessary. The same holds true for many North African and South American oil producers who may be strong on reserves but still have quite limited capacity to export more oil amid creaking infrastructure and worsening economic outlooks that will thwart foreign investment.

With the Russians and Iranians incentivised to rattle the cages of Western economies, this winter could see further stockpiling that alone will cause the market to tighten. The petro-dollar meanwhile has strengthened through the year, magnifying energy inflation effects in many oil importing countries. Indeed, inflation is a key factor to watch for general energy consumers, with rises in petroleum product prices evidently feeding to gas and liquid fuel markets with contract prices fixed against oil and escalation terms indexed to oil in a stronger petrodollar.


Natural gas prices increased another 12%, following on from their 15% climb over the May and June period amid expectations of continuingly high crude prices and a cold and protracted European winter that might extend into the shoulder months of March and April, when the Forward Market is generally at its most volatile and gas storage close to depletion in some regions.

In particular, the UK is now without a major gas storage facility following the closure of Centrica’s Rough platform. Whilst concerns over the security of supply from Russia and other Eastern countries may have been overstated in the past year, the forward market is probably now building, amid clearly rising East-West tensions, a higher risk-premium into prices out on the curve. Last month the UK’s annual gas contract hit a ten year high, breaking past 70 pence per therm at one stage.

However, today sees gas prices being influenced by an ever-expanding mixture of global supply & demand factors, with LNG playing a marginal supply role, including recent hurricanes in the USA which drove up crude and spot gas prices up in tandem. In fact, there has been no shortage of bullish news to keep the prompt market strong and this is now affecting gas prices further out on the curve, even if the actual justification for rising long-term gas prices is tenuous. Indeed from a resource perspective there is no actual or expected shortage of gas. The commodity enjoys an increasingly wide geographical spread as far as production is concerned and, according to the latest BP figures, the world has well over 300 years of forward supply at current rates of consumption. In reality however, short-term security of supply concerns, together with persisting long-term indexation to oil, have served to keep driving gas prices higher. The NBP traded over-the-counter price for gas has since risen by over 75% in the last eighteen months.


Although it had been hoped that most of Europe’s reactors would be back up after the summer hiatus, when a lack of cooling water supplies forced many to go offline, there have been reports of persisting outages. The age of nuclear fleets across the Continent is now a growing concern. In the UK too, all existing nuclear power stations, bar Sellafield, are due to close within five to ten years.

It is also becoming clear that renewable electricity and sub-sea interconnectors will not plug the gap, with new-build reactor projects arriving late, due to construction and safety problems, or not even getting off the ground at all amid concerns over technology, rising costs and funding.

In the backdrop, several European countries are quietly permitting the building of new fossil-fuelled power stations. Germany is currently installing coal-fired plants at a faster rate than the Chinese and last month it sanctioned the felling of an entire tree forest to produce the lignite dedicated to power generation.

The UK government itself has just given the go-ahead for a mammoth 2,500 MW gas-fired power station at Eggborough, the site of a former coal-fired plant that was closed only recently. This new power plant will produce some 80% of the output of Hinckley Point C; it will come on line sooner and it will not entail any meaningful subsidy, not from government or from the consumer by way of price-support under CFD tariffs added to bills.

Whether or not these examples mark a general policy shift towards fossil-fired generation remains to be seen. In the meantime, however, the market is tightening.
About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

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 private entities on a range of energy origination, strategy and trading issues.

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