Here is a 2023 energy round-up, from one of our experienced experts:
Brent closed the year generally flat. Little change in January but the seemingly placid market was punctured by two strong rallies on 28th March and 23rd September, intra-day spot prices hitting $125 both times. The market could yet turn bullish in months ahead, especially if China reopens fully and pent-up demand in South East Asia competes with spare supply from OPEC+.
Troubles relating to Russia and within Iran are worsening. These oil producers may be supported by fellow ‘hawks’ within the cartel, resisting initiatives aimed at moderating oil prices. Either way, the lack of investment across key some oil-producing states may limit the scope for export production increases. Heaping pressure on Saudi Arabia to offer flexibility which it mightn’t have, or not in the volume needed to stabilise a rebounding oil price. Even if the kingdom did choose to increase output unilaterally, alienating itself politically in the process, this mightn’t affect market prices very much. Whilst the consequence of any failure to do so – after attempting it – might only spook the market further and so have the opposite effect. The kingdom remains reliant on seven principal fields now nearly 100 years old, one of which is known to be faltering. So ministers might face a delicate balancing act were global demand to take off significantly.
The market rumours that the Biden Administration may soon trigger a release from the US Strategic Petroleum Reserve once oil moves past $100/bl could be discounted however. The SPA was triggered only early last year, in spite of which the market went on to climb sharply. It is doubtful this gambit will be played out again soon, or not until viewed as absolutely necessary.
However, the apparent calm in the crude market may be deceptive. In some respects, oil remains “the poor man’s gold’ so any new ‘surge’ in general commodities prices or a re-set of the petro-dollar, as some monetary economists are predicting, could drive oil prices up along with them.
Forward gas prices have now fallen by some 300% since late summer. But the market still faces an unsettling period months ahead. Going to wire, the situation in Eastern Europe is only worsening. Now, with troubles resurfacing in the Balkans, there are reports of civil unrest and road blocks. Although reports are limited in scale, it was just such a road block that served as the trigger to the Yugoslavian war of May 1991 then all the turmoil in Kosovo. It is theoretical but not far-fetched to envisage a Serbian, Belarusian and Russian axis emerging. Exploited by the latter in support of its war in Ukraine. Signs of any war spreading could certainly pose a threat to remaining supply routes and influence gas prices accordingly.
US, Qatari and Norwegian LNG supplies helped in the restocking of European storage facilities last year. But LNG can only go so far. The reliance on Russian gas supplies is still there. In fact, France recently become Russia’s largest gas customer and is believed to have imported as much as 7 million tonnes of LNG in 11 months, roughly 10 billion cubic metres.
EU countries and the UK signed medium-term (1 to 3 year) LNG supply contracts with US producers. But such imports have come at a price. In the main, the substituted Russian gas had been supplied under long-term Gas Sales Agreements, 15 to 25 year deals chiefly indexed to petroleum products, general prices and commodities’ indices. At current prices, much of this forfeited Russian gas would have been delivered below £2.00/th. Compared to Treasury-backed strike prices to pay for the extra LNG reported at circa $90/MMBTU. At the prevailing $1.10/Sterling exchange rate, that price works out at [90/1.10] ÷ 10 or £8.00/th. The UK appears to have taken the fourfold price increased in its stride. Not so in the case of France or Germany with a proper diplomatic scrap breaking out last month. Energy ministers of both EU states openly accusing the USA of “profiteering” and repeating the charge in both their national assemblies, unlikely though it is to make a difference now.
But significant new LNG exports from North America are anyway unlikely on account of soaring domestic demand, gas reservoir constraints and maxed-out LNG terminal capacity. The complete re-opening of the Chinese economy, possibly matched with rising gas demand across South East Asia, could tighten global LNG market further.
New gas price gyrations remain possible therefore with much of the “good news” (from a buyer’s perspective) already built into the wholesale price, which has returned below pre-invasion levels. With three or four high-demand months to go, April month traditionally being the most difficult for a gas trader to cater for, this market could yet turn on a sixpence, especially if events pertaining to Ukraine or the Balkans take a further turn for the worse.
Power prices remained volatile throughout 2022 amid concerns over ageing nuclear power plants on both sides of the English Channel. At one point, half France’s 56 reactors were out of commission causing EEX auction prices to spike above €1,000/MWh on successive occasions. The UK with its more diversified power plant portfolio saw its ‘workhorse’ Advanced Gas-cooled Reactors (AGRs) perform comparatively well. But this chapter must draw to a close soon. All still-operating AGRs are set to shut completely in 5 years time, now with threats by owners to close the Heysham II and Hartlepool early, unless the government agrees to rescind its new 45% Energy Profits Levy in respect of nuclear assets. Whether it is Whitehall or EDF & Centrica (with 20%) who will blink first remains to be seen. But both reactors must shut anyway by 2027 given their age and original design lives in each case. Both to be followed a year or two later by Heysham II and Torness for the same reason. At which point the UK will have no AGRs left, just the single pressurised-water-reactor stationed at Sizewell, possibly joined by Hinkley Point C in 2018.
A policy to refocus on thermal plants may be needed. Gyrating OTC market prices of gas, coal, carbon (now trading back above €90/tonne CO2e), windfall taxes, unfavourable fiscal and legislative measures targeting fossil fuels’ generation has all but halted their redevelopment. Gas was fleetingly mooted as a “Transition Fuel” during the Truss administration. But few signs now of any imminent government encouragement for new thermal power stations, mining, North Sea or other UK projects required to support them.
Looking at a five-year time horizon, the power market does looks set to stay tight amid growing electrification nationwide spurred on by expanding data centre, space heating and electric vehicle demand. So new peak-load generation will be needed in order to keep the system balanced and spare end-users incurring unsustainably high power prices.
Installed UK renewable capacity is still increasing at a rate of less than 1½ per year which will not be enough to offset the impending void left by decommissioned nuclear plants. Import interconnectors will have an important role to play. Although installed capacity and (firm) supply contracts are very different things. Additionally interconnectors and faraway power projects can be inherently unreliable in practice, even with the state of the art cables and high-voltage transmission technology now available.
The short-term picture too is uncertain for reasons outlined above. There was better news for buyers in that Forward Year prices have now fallen some 250% since the late summer peak, as reported in the August News Flash, even if much of this news has already been discounted in wholesale prices by now.
“The lack of investment across key some oil-producing states may limit the scope for export production increases.”
– This Expert is a complete gas industry professional with uniquely broad experience spanning LNG, pipeline gas trading and gas project development at an industry-leading international gas company, where he worked for around 25 years.
– His most recent roles have seen him work in Russia, the U.K., and other European locations. Job titles have included: ‘Director of Major Projects’, ‘Director and Board Member for Marketing and Strategy’ at the European trading arm of the company, and ‘Head of Global LNG Consulting and Forecasting’.
– His vision for the future of the European gas industry won him a nomination for Gas Executive of Year at the European Gas Conference.
– Since April 2019, the Expert has been working as an independent consultant advising on LNG project development and demand/price forecasting for the LNG and gas industries.
– He is currently working with a leading academic research institution on the pricing of gas in the EU power market.
– The Expert is a native English speaker. He also Speaks fluent French and Russian.