Changeable weather was the key driver in another very volatile month for UK energy prices. Milder weather from mid-January meant that gas prices fell 3% down to 1.64 p/kWh and electricity prices came off about 5% to 4.68p/kWh. Oil prices also fell during January as the increase in the US rig count virtually offset the reduction in oil output by OPEC and non-OPEC countries.
The current level of crude oil pricing allows low cost shale drilling to come back on stream in the US. Oil closed the month 3% lower at $55.20/bbl. There seems to be little confidence that the efforts to reduce the global oil supply glut will see prices rise much above the current trading range of $55 to $60/bbl. The coal price shifted marginally upwards closing January at $65.00/tonne.
The weather will very much be the key feature in February as a cold snap is forecast for the latter half of this month and will determine the demand for gas for heating. On top of a tight UK gas storage situation higher prices in Asian markets are attracting global LNG cargoes away from the UK where they normally provide a critical balancing function. Colder weather in central and western Europe is supporting gas prices and the UK generated a record amount of electricity from gas during January for export to France to supplement their ailing supply situation. French consumers were asked to turn heating down to reduce national demand.
President Trump’s interesting first week and particularly his announcement of protectionist trade policies had the effect of weakening the US dollar. His combative approach has done very little to reassure international markets but on the other hand a weaker dollar makes dollar priced gas cheaper in the UK market.
The Capacity Market auction for winter 2017-2018 has been running between 31 January and 3 February. This auction is held to secure guarantees of additional electricity generating capacity for the next winter period when there are concerns that the generating margin will be extremely tight. The auction clearing price has not yet been announced. Ultimately of course this cost will be passed on to end users.
We can expect price volatility to continue for the next few weeks.
Article by: Richard Clayton