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2018: A Challenging Year for the Energy Market

With 2018 now behind us, here is a brief overview of last year’s market drivers and industry changes that made a significant impact on the prices of gas and electricity in the UK. 

A Word About Brexit

Some argue that, in isolation, Brexit hasn’t had a major impact on the performance of the energy market, but is it possible to treat it as an isolated event? Even if it is, it cannot be argued that Brexit negotiations had a significant impact on several key price influencers, such as the value of the pound against the euro, changes in legislation, and, arguably the most important market movement generator, sentiment.

Legislation

Last year brought about some significant changes in energy legislation. DCP 161 and DCP 228 both came into force in April 2018 and had a significant impact on all half-hourly users.

DCP 161

The purpose of this new legislation is for the excess capacity penalties being enforced to assist the Distribution Network Operators (DNOs) with balancing out network usage, while DCP 228 aims to accurately reflect the distribution costs incurred by network operators during peak and non-peak periods.

Trump’s Presidency

A series of the US president’s decisions had a direct impact on oil prices, which last year reached their highest levels since 2014. Perhaps the biggest impact came from the president’s decision to unilaterally exit the nuclear deal with Iran, which supported a further rise in crude oil prices. It is difficult to make any projections when it comes to Trump, but with a projected price of $61/b in 2019, which is $11/b lower than the EIA prediction from just a month ago, it is fair to expect a very volatile year at least in terms of oil prices.

LNG Deliveries

We have a very positive 2019 outlook when it comes to LNG deliveries. In 2018, we received 69 cargoes of LNG overall. The LNG market enabled the UK to balance the gas supply and demand during unusually low temperatures in Q1 2018 (during the so-called Beast from the East). It’s important to note that the LNG market is very price-sensitive, and if Asian demand continues to rise as was the case in 2018, it may continue to affect the UK outlook as well.

Weather

The first months of 2018 were promising with prices softening significantly. However, the Beast from the East, which brought with it unusually low temperatures coupled with heavy snowfall, changed the outlook. EU and UK energy markets have been recovering from the effects of it ever since. The current gas market is in a downward slope, but after temperatures dipped below average last week and chances increased of cold, wintry weather through late January and into the start of February, we may expect further market volatility.

Related Fuels

High carbon prices throughout 2018 served well in terms of making coal power plants less attractive and generating natural gas demand. In Q3 2018, 56% of electricity was sourced from a combination of renewables and nuclear power, an increase of 2% year-on-year. Increased capacity and favourable weather conditions meant that renewables contributed 33.1%.

“China continues to be at the forefront of this with its aggressive coal-to-gas switching. Carbon is trading lower at present, but the Market Stability Reserve, starting soon, will reduce permit availability and can reverse the current sentiment,” said Wayne Bryan, Senior European Energy and Commodity Analyst at Alfa Energy Group.

It will be interesting to track the gas market curve in 2019 considering that EIA expects Brent spot prices will average $61 in 2019 and that West Texas Intermediate (WTI) crude oil prices will average about $7/b lower than Brent prices this year.

“Financial markets are pricing in a 60% chance of a US recession in 2019, adding up to a very poor economic forecast across the globe. Despite the implementation of the OPEC production cuts, we’ve seen crude at a 16-month low with the projected US crude production forecasted to top 12mbpd soon. It is important to note that Russian output also hit a record,” remarked Wayne Bryan.

Last week, UK gas prices decreased as strong imports from Norway, and additional LNG cargoes led to an oversupplied system. The gas price for next-day delivery went down 1.8% to 60.15 p/therm. The contract for delivery in Q2 19 traded 0.9% lower at 54.07 p/therm, but is this just a short-term dip before another Beast from the East visits us?

Sources: Energy Legislation, Refinitiv (formerly Reuters, The Guardian, BBC Weather, and U.S. Energy Information Administration

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Alma Zino

Energy Consultant at Alfa Energy
Before she joined Alfa Energy Group as an energy consultant in July 2017, Alma Zino worked as a brokerage consultant specialised in trading contracts for difference with her focus being crude oil, natural gas, and CFDs. She graduated with a degree in International Finance and Banking with high honours. Alma current works with clients from the UK and EU, helping them procure their energy contracts and maintain costs.

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Alma Zino

Before she joined Alfa Energy Group as an energy consultant in July 2017, Alma Zino worked as a brokerage consultant specialised in trading contracts for difference with her focus being crude oil, natural gas, and CFDs. She graduated with a degree in International Finance and Banking with high honours. Alma current works with clients from the UK and EU, helping them procure their energy contracts and maintain costs.