Market Outlook

As you’d expect Covid-19 will impact on short and long-term prices depending on businesses reopening, and if we get a second wave creating another lockdown.  Current rates are still low making it a good time to consider long-term deals.

Electricity

Businesses have started to return as lockdown eases causing the demand for electricity to lift. The increased demand has coincided with a sharp fall in wind generation causing prices to rally higher in the short term. Electricity may continue to rise as the hospitality sector looks to reopen on the 4th July.

Gas

Gas is experiencing a similar story to electricity. Despite decreased imports from main supply country Norway, UK gas storage reserves are at capacity.  Liquefied natural gas (LNG) imports remain on steady supply and at competitive rates.

Read on for more detailed information on the market…

The UK power market has been mostly bullish so far in June, with short-term prices much more so than forward levels. Physical demand has improved at the same time as physical supply has been impacted by a sharp drop in wind levels, while longer-term sentiment has been bolstered by expectations that further lockdown loosening will lift power use — tempered by fears of a second Covid- 19 wave, as with other energy markets.

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Over the last few days Day-ahead UK power has pushed above £30/MWh for the first time since late March when the lockdown started, helped by a lack of wind slashing wind-farm output below 300 MW, or less than 1% of national output, while a complete drop in imports through all interconnectors reinforced the rally, as did an increasing reliance on gas, which also saw short-term prices rebound. Weekend-ahead UK power prices (which went negative just a few weeks ago) have also risen again, trading up to £23/MWh.

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Month-ahead has similarly rallied to its highest level since late March, above £28/MWh, and a £5/MWh or 22% increase on the 13-year low it reached at the end of last month.

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Further forward, the seasons and annuals saw the most bullish talk earlier this month, since which time they have struggled to hold onto their gains. Both Winter ’20 and October ’20 Annual shunted up by £2/MWh, or around 5% in value – to their highest levels since early March – in the first week of June, before shedding more than half of these gains in the second week, only to start edging higher again in the third week — as perceptions on lockdown lifting, economic recovery and a second virus wave vacillated.

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French nuclear concerns for the coming autumn/winter due to virus- related maintenance disruptions continued to support longer-term discussion too, while firmer oil, coal, continental power and emissions prices also underpinned talk.

Oil has risen on the back of OPEC agreeing to extend current emergency production cuts through July, despite US oil inventories reaching a record high, while coal has been helped higher by the disruption of Russian coal exports from Murmansk after a rail supply bridge collapsed.

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EUAs (CO2 allowances that generators factor into costs) meanwhile have continued their price resurgence – 2020 EUAs climbing from below EUR 21/TCO2 to above EUR 23/TCO2 at one stage, amid expectations of greater demand as European industrial activity ramps up again.

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October ’20 Annual is currently valued around £40/MWh, still up 11% from the sub-£36/MWh price trough it reached at the very start of April.

Outlook

The first major heatwave of the summer is set to hit Europe in the coming days, accompanied by continuing weaker than average wind levels, according to forecasters. “The weather is likely shifting warmer and drier in the UK. The warmest and driest signal should be observed over the southern sectors, with the most northern regions potentially windier,” says Marex Spectron’s meteorology desk.

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Britain has become the second biggest producer of wind power in Europe this year, with a 12.2% share of continental output in the Jan- May period, overtaking Spain (and lagging Germany’s 32.7%), according to consultants EnAppSys.

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There will be no shortage of power supplies in France next winter, French network operator RTE has said, despite less nuclear capacity being available than usual (as long as temperatures are near seasonal norms). High hydropower capacity (reservoirs are currently at a 10-year high), fossil fuel generation, imports and demand side reduction measures would all help ensure there was enough power, it said, adding though that “heightened vigilance” might be needed in the autumn, due to lower nuclear availability.

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Workers at Drax, the UK’s largest power station, are to vote later this month on whether to take industrial action this summer over proposed redundancies in the coal section of the plant.

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EUAs could fall as low as EUR 15/TCO2 over the coming weeks, according to analysts at Berenberg Bank, as they say the pandemic has increased the surplus of allowances to almost 200 million.

Coal prices may also come under pressure if China continues to increase import restrictions.

Short-term rebounds sharply

Short-term UK gas prices have rebounded strongly over the last fortnight. Temperature drops and periods of very low wind have boosted end-user and generator demand, pushing consumption above seasonal norms at times, while imports from Norway have fallen again. At the same time longer term prices have also moved higher, but with much less conviction.

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Day-ahead and Month-ahead UK gas prices have recovered sharply from the respective 13-and-a-half-year and 22-year lows they reached in late May, both gaining as much as 6 p/th, or 70%, since then, to reach over 14 p/th. Short-term prices across Europe have also rebounded sharply, with Day-ahead on the biggest hub – TTF, in Holland – trading as high as EUR 5.45/MWh, up from a record low of EUR 2.35/MWh a few weeks ago.

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Norwegian exports to the UK have slipped further in the first half of June (from May levels that were already reportedly down 40% year- on-year), amid new unplanned outages at the Troll, Aasta Hansteen and Gullfaks fields. Imports through the key Langeled pipeline, have mostly been between just 5-10 mcm/day (or around 10% of capacity), even falling to zero a couple of times — although they kicked sharply higher as the second half of June got underway, as the outages ended and UK demand ramped higher.

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UK demand was ratcheted up mid-month particularly by increased generator buying, as gas-fired power stations boosted output to compensate for wind power levels dropping to near zero (gas-fired output surged to its highest levels since before lockdown, accounting for almost 65% of electricity supply). Continued solid exports to mainland Europe and Ireland have helped underpin prices too.

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LNG imports into the UK have at the same time continued to be robust, with LNG storage sites reaching almost 90% fullness (1.23 BCM) for the first time in many months. However, falling LNG deliveries into mainland Europe and fears about reduced LNG deliveries to the UK in the coming months as the cancellation of shipments tightens the global market, have helped shore up forward prices.

The easing of lockdown restrictions in several countries, including the UK, has also provided some uplift to forward prices, although fears of a second Covid-19 wave have kept any bullishness in check.

October ’20 Annual has as a result been scooped up from the record low of 29 p/th it reached at the start of June. Rising as high as 31 p/th it has since settled in around 30 p/th.

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European gas storage sites are currently at 76% fullness, compared to 66% fullness at this time last year, according to Gas Storage Europe, the storage operators’ association.

Outlook

“The potential number of LNG ships into Europe over the next four weeks has been slashed by almost two-thirds since mid-May, from 69 to 24,” according to newswire Montel, citing figures from analysis firm Eikland LNG. LNG tankers from other LNG-producing countries, including Nigeria and Trinidad, have meanwhile been reported heading to the US.

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A planned shutdown of the biggest gas interconnector (the IUK pipe - between the UK and Belgium) has been postponed from November to Summer ’21 due to Covid-19 affecting equipment delivery and resources.

The IEA (International Energy Agency) says the global gas demand slump is likely to be 4% this year, not 5% as previously anticipated, still the biggest yearly fall ever.

The US is planning to expand sanctions on companies and authorities connected with the construction of the Nord Stream 2 gas pipeline between Russia and Germany. The German government has called the plans “a serious interference in European energy security and EU sovereignty."

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“Later in our forecast (beyond day 10), there is a chance for unsettled conditions to take over once again, although the forecast uncertainty is rather high,” says Marex Spectron’s meteorology desk.

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Fears of a second European Covid-19 wave and potentially new lockdowns going into the winter, could continue to hang over the market throughout the summer, particularly if further flare-ups (such as the current one in Beijing) are seen elsewhere.