Coronavirus is a force that most of us will never have seen in our lifetimes, an unprecedented situation has been imposed upon us all, our country and the rest of the world. Pandemic contingencies have had to be put in place and the residents of our country and the government have ensured that we are doing our utmost to try to control this.
Not only the health of our country is at risk, but our economy is too. Reflected succinctly in our markets.
Which we will now review.
Covid-19 has hit the energy markets hard. Demand for business energy has reduced as lockdowns force people to stay at home. Many manufacturing sectors have seen activity grind to a halt. Meanwhile, a lack of confidence has led to steep declines in the equity markets, which in turn have compounded the situation.
This is reflected in the near season electricity and gas price for Winter-20 (the wholesale price for the delivery period between 1 October 20 and 31 March 21 inclusive) concluded at the end of Q1-2020 29% and 41% lower respectively compared to the same period in 2019. In Q1-2020, the contracts fell 20% and 26% respectively.
Weak supply and demand fundamentals for gas and power have played their part of course, but the oil price has – as it always has been – an important driver of UK energy markets. Brent oil prices settled at $22.74 per barrel at the end of Q1-2020, the lowest levels since March 2002. Oil prices have dropped as airplanes have been grounded and commuters work at home – pulling the rug away from under the oil market.
Oilprice.com explains the impact of the oil crash on some countries ‘If current market conditions continue, their income from oil and gas will fall by 50% to 85% in 2020, reaching the lowest levels in more than two decades, according to recent IEA analysis. This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as healthcare and education,” OPEC and the IEA said in a joint release.’
Not only has Coronavirus had an impact, the price war between Saudi Arabia and Russia (two of the largest oil producing nations) announced on 8th March, has also been a major contributor to the oil crash. Following the announcement further falls were triggered in oil, global stock markets, gas and power markets. At the end of March, the first tentative signs emerged that the two countries might pull back from the conflict. However, in the face of ongoing lockdowns and fading prospects of a ‘V’ shaped recovery, the probability of a meaningful rebound in oil prices looks remote at this stage.
If we focus on UK energy fundamentals, in particular, the weather. Latest temperature forecasts for April are pointing to above seasonal norms. This is likely to reduce demand for gas from households. Meanwhile, as we are all too aware families are being forced to stay at home to work and educate, with schools being closed and the majority of businesses moving into a work-from-home digital environment. This means demand for electricity from the domestic sector is likely to increase.
Barring any unplanned events and outages, gas production from the UK Continental Shelf (UKCS) is expected to be stable for now. UK imports of Norwegian gas fell sharply at the end of March, with Norwegian producers likely to curb production further should the downward trajectory in European and UK energy prices continue. Should system tension come about and any shortfall in supply against demand, liquefied natural gas (LNG) will remain a key and flexible supply source. Several LNG cargoes are expected to arrive in the UK in the first two weeks of April thus increasing our supplies.
There is no doubt that the markets have been hit hard in the first quarter of the year, predominantly by Coronavirus which will certainly continue to affect the markets for as long as it’s impacting our everyday lives. Commodity markets are difficult and complicated to gauge, forecast or even predict. We ensure we use detailed software to monitor their every move, on a daily, weekly, monthly and annual basis.
We are here to help our customers and prospects navigate through these uncertain and challenging times. Customers who require a quote or reprice on their energy plans or portfolios can benefit from recent energy price falls. Utility Team remains open for business and can advise you on this, we will ensure we strike the best possible energy deal on your behalf, to save money for your business and it’s future.
Article written by: Anita Sainsbury, Head of Energy Markets, Pricing & Risk