Mar 9th 2017

Last Month Summary

Turbulent weather conditions hit the UK as Storm Doris caused travel disruptions and building damages. However, wind speeds up to 80 mph offered a significant boost to British wind power generation, while temperatures also continued to rise. Temperatures averaged around 4°C above seasonal normal levels, reducing gas demand to be used in heating, driving gas prices down 7% to 1.53 p/kWh and electricity prices down 5% to 4.47 p/kWh. However, towards the end of February the Met Office issued a severe weather warning, as Britain braces for sub-zero temperatures in parts of the UK for the first week of March.

Oil prices were range-bound during February, closing the month at $55.59/bbl after a drop of just 0.2%. The limited success of international cuts to crude oil production was offset by a sustained increase in drilling activity by US producers.

Coal prices rose 1% to $67.85/tonne, while the cost of European carbon permits fell 2.2% to €5.24/tonne.


Energy Price Outlook


What to watch out for: As expected during Winter months, temperatures continue to be the biggest price driver for gas and electricity. This is likely to remain the case for the time being, especially with colder weather forecast for the first week of March. However, any new developments at Rough storage – which has banned gas injections until 1 July – could help drive market movement.

Recommendations: We expect gas and electricity markets to remain broadly bearish until the end of March, driven lower by milder temperatures and an oversupplied gas system. However, with the Summer 2017 contract expiring at the end of the month, it is not advisable to wait until the last minute to lock in any remaining volume.



Construction underway for new 1,000MW UK-France ‘ElecLink’ interconnector

Construction work has begun on a 1,000MW electricity interconnector between the UK and France that aims to improve energy security and reduce prices. The £390 million ElecLink project will give the UK greater access to the continental electricity market, allowing power to be both imported and exported to take advantage of wherever prices are cheaper.

The project will run through the channel tunnel between Sellindge in the UK and Les Mandarins in France, and will have the capacity to power up to two million homes. The HVDC cable is scheduled to become operational in 2019.


Oil little changed as expansion of US crude drilling wipes out OPEC-led production cuts

Brent crude oil prices were little changed last month, as the bearish impact of increasing output from US crude oil producers wiped out the bullish impact of confirmed OPEC and Russia supply cuts.

OPEC’s record compliance with the deal has surprised the market, and the biggest laggards, the UAE and Iraq, have pledged to catch up with their targets.

However, official US government data by the Energy Information Administration (EIA) showed that US crude inventories had risen for a seventh straight week – the result of increasing domestic production in the States. EIA data showed stocks rose 564,000 barrels to 518.7 million barrels last week.


UK inflation highest since 2014

In Britain, the Office of National Statistics (ONS) revealed that the UK economy grew faster than previously thought in the fourth quarter of 2016, expanding by 0.7% in Q1-2016 – above the previous estimate of 0.6% released in January.

Inflation has reached its highest rate for two-and-a-half years, mainly as a result of the rising price of fuel. Annual inflation as measured by the Consumer Prices Index (CPI) reached 1.8% last month, the ONS said, up from a rate of 1.6% in December. It is the fourth consecutive month that the rate has risen and takes inflation to its highest since June 2014.


Mixed US economic data as investors wait for Trump policy speech

US Federal Reserve Chair Janet Yellen did signal that more than two interest rate increases may be possible this year as the economy approaches full employment and inflation closes in on the Fed’s 2% goal.

However, other important indicators in the US economy showed a mixed picture as investors await a speech by President Donald Trump. Trump will address the US Congress on late on 28th February, when he is expected to deliver some long-awaited detail on his economic policies, including campaign promises of up to $1 trillion (£800bn) in infrastructure stimulus.


Non-Energy Costs – Capacity Market auction for Winter 2017/18 clears at just £6.95/kW

The Capacity Market auction for 2017/18 delivery cleared at £6.95/kW, the Electricity Market Reform (EMR) delivery body confirmed in early February. Guaranteed contracts totaling 54.4GW (£377 million), were handed to UK power generators, with the cost of the scheme being added to customers’ bills from November 2017. Industry experts were largely predicting a figure between £10-20/kW, meaning that many have been surprised at how low the auction has actually cleared.


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