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Good Month for Prices, Despite Political Tensions

UK Energy Market Update


January 2024


Market Summary


January saw several named storms arrive on UK shores, bringing with them an increase in renewable wind generation and colder weather. These cold snaps didn’t last long but did impact gas storage levels as we saw several withdrawals throughout the month. We ended the month with EU storage above 70%, which is well above the 5-year average. If withdrawals continue at similar rates, we will end the winter period with storage above 50% full.

 

Tensions remain high in the Middle East as the Houthi militants attacked several ships travelling through the Red Sea through January. The recent attacks prompted the US and UK to instigate air strikes within Houthi controlled areas of Yemen, reinforcing fears of a wider, more prolonged conflict in the region. This has added even more volatility to the energy markets. An increasing number of shipping firms are avoiding Red Sea transit routes amid the escalating tensions, favouring the longer and more expensive Cape of Good Hope route via the southern tip of Africa.

 

The United States was the world's largest LNG exporter in 2023, achieving a historic milestone with shipments totalling 88.9 million tons. This marked a 14% increase over the previous record established in 2022, which stood at 77.5 million tons. The two main factors driving such high LNG output in the United States were Freeport LNG's return to full capacity and a new LNG facility in Louisiana, both of which help boost exports.

 

China currently stands as the world’s biggest consumer of LNG. In the past year, China experienced a notable surge in LNG imports, recording a growth of over 12% to approximately 71 million tonnes. Projections indicate a continued upward trajectory, with Chinese LNG consumption expected to increase by 20% to reach 84 million tonnes in 2025 and further climb to 136 million tonnes by 2030.

 

Norway’s Ministry of Petroleum and Energy has awarded 62 gas licenses (up from 47 last year) allowing for exploration in close vicinity of existing fields across the Norwegian Continental Shelf. Norway is now the largest exporter of natural gas to European markets and has been key to replacing supplies that were lost following Russia’s invasion of Ukraine and the loss of once critical Nord Stream pipeline.

 

On the 26th of January, the US Government announced that new LNG projects will need to be indefinitely suspended while climate impact assessments are conducted as part of a wider green push. The news has likely shaken global energy markets, with the US being crowned as the biggest LNG exporter for the first-time last year after overtaking rivals Qatar and Australia.

 

In 2023, renewable energy generated in the UK was more than enough to power all of the UK’s 28 million homes, according to new figures. Analysis from the ECIU found that the UK’s wind, hydro and solar projects are estimated to have produced over 90TWh during the year.


Net Zero News


The UK government plans to accelerate progress on new nuclear projects by setting a schedule that mandates an investment decision every five years from 2030 to 2044. Additionally, it will explore the possibility of constructing a new, large-scale nuclear plant.


The European Commission is expected to recommend that the EU should cut its net greenhouse gas emissions by 90% by 2040, compared to 1990 levels. This move aims to pave the way for the bloc to achieve net zero emissions by the following decade, according to sources familiar with the matter.

 

French utility company EDF once more postponed the commencement of its long-delayed Hinkley Point C reactor plant in Britain, now expecting it to start no earlier than 2029. The updated estimated cost is between £31 billion and £34 billion ($43 billion) based on 2015 values.

 

Tata Steel has confirmed the shutdown of two blast furnaces at its Port Talbot plant as part of a larger restructuring plan. The decision aligns with the company's transformation strategy to transition towards a more sustainable and environmentally friendly steel business model.

 

New data shows a 49% rise in applications for heat pump installations under the government's Boiler Upgrade Scheme (BUS). December figures from the prior year indicate a growing trend, linked to an increase in grants for air source heat pumps announced by the Prime Minister in October.

 

National Grid's Viking Link, the longest land and subsea interconnector globally, started operating commercially on December 29, 2023. This £1.7 billion project links the UK and Denmark through a 475-mile cable. With a capacity of 1.4GW, Viking Link is designed to transmit electricity that can power up to 2.5 million homes in the UK.

 

Investment in the global shift to low-carbon energy hit $1.8 trillion in 2023, up 17% from the previous year, says a report from BloombergNEF. Electrified transport, taking over a third of the total investment, became the primary driver, surpassing renewable energy.


Electricity and Gas Prices


High levels of volatility remain in the market due to tensions in the Middle East. While volatility remains, the tensions haven’t had a noticeable impact on prices as we saw drops across all pricing periods this month, with power prices seeing the biggest decreases. Day ahead electricity prices continued to have a large range, with a low of 53 £/MWh and a high of 90.75 £/MWh this month.






Flexible Purchasing


EPEX Price

Some of our flexible purchasing customers are buying on EPEX, a European auction for power. Because they auction every hour of each day, customers get the “market average” price as opposed to a fixed-term contract over e.g. a 12-month period. Being on this product means that you will pay the average of each day for the month and once the market falls the price will follow.

 

The EPEX price finished the month with an average of 7.27 p/kWh (commodity). With the non-commodity added to this, the overall rate will be around 20.17 p/kWh+.


Carbon Prices



EU carbon prices fell around 18% this month, ending the month at 64.40 €/tonne. This is due to weak demand from power plants, strong renewable output and sluggish industrial demand.

The price for UK carbon fell to an all-time low in January, sparking fears it will weaken incentive to build cleaner renewable energy sources. Futures contracts tracking the UK carbon price to December dropped to £31.48 /tonne. Analysts attribute this drop to the mild winter weather, reduced demand from industries, and an excess of available permits for pollution coverage in Britain.


Oil Market



3rd - The price of Brent crude oil has been going down since the start of the year, mainly because of the weak economic data in the US and improved prospects in the Red Sea situation. On the flip side, China's ongoing demand for oil is helping to support overall demand. Predictions indicate that China's oil consumption will increase in 2024.

 

5th - Oil prices are up, currently at $78.44. The prices are fluctuating because of worries about the oil supply caused by ongoing tensions in the Middle East, including planned attacks by Israeli forces, as reported by the Israeli defence ministry. Additionally, the US is contemplating interest rate cuts, which might increase oil demand by reducing consumer borrowing costs.

 

11th - Brent crude oil is currently at $77.8, trading higher. There's rising market uncertainty because of concerns about increased conflict in the Middle East, including recent attacks on Gaza and vessels in the Red Sea. Despite prices going up, the latest US crude inventory data from yesterday revealed a surprising 1.3-million-barrel increase last week, contrary to the expected 700,000-barrel decrease, indicating weaker demand in the economy.

 

12th - Brent crude oil is now at $79.3, showing an increase in trading. The ongoing threat from the militant Houthi group, announcing continued attacks on commercial ships after US and UK air strikes in Yemen, along with news of Iran seizing an oil tanker near the Strait of Hormuz yesterday, has added to the instability in crude prices.

 

18th - Oil prices have risen because of positive expectations for oil demand in the next two years. According to OPEC, oil consumption is projected to increase by about 1.85 million barrels per day (bpd) this year and the next. However, the prices are still fluctuating due to tensions in the Middle East and continuous attacks in the Red Sea.

 

19th - Oil prices are steady, currently at $79.4. The Energy Information Administration (EIA) reported a notable 2.5 million-barrel decrease in crude oil inventories, contradicting expectations of a 313,000-barrel reduction by investors. Analysts attribute this increase in oil demand to the robust need for crude at oil refineries.

 

22nd - Oil prices have dropped this morning, even with the ongoing tensions in the Middle East and an attack on a Russian fuel export terminal. The Houthi militants are still posing a threat to trade in the Red Sea, and Russia has reported an alleged Ukrainian drone attack on one of its export terminals over the weekend. This has led to some operational delays at the Baltic Sea.

 

25th - Oil prices have risen this because of fresh data on US crude stocks. There was a notable decrease in US crude reserves, about 9.2 million barrels, surpassing the expected withdrawal of 2.2 million barrels. The colder weather caused some oil wells to freeze, leading to reduced crude oil output, necessitating the withdrawal.

 

29th - Oil prices have increased due to rising tensions in the Middle East. Houthi militants struck another fuel tanker in the Red Sea, continuing their attacks on vessels. Additionally, there was a reported drone strike on US forces in Jordan, raising concerns about a potential escalation in Middle East conflict that could affect oil supply.



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