Energy Crisis-Time to relax?
All through the summer and much of the early winter season in 2022, headlines were filled with the ever increasing gas and power prices which reached levels never imagined ahead of the Russian invasion of Ukraine.
Recently however, the media has become a lot quieter- following government intervention, gas prices have been falling faster than expected, and the talk is more about Jeremy Hunt’s budget ‘buffer’ that has been created to spend elsewhere, rather than a continued crisis.
So can we all relax and assume that the worst is behind us?
The simple answer is no- albeit there are reasons for optimism. Significant caution is still required for winter 2023 and beyond, which is where the traded markets are now focused.
If nothing else, the energy crisis has demonstrated to everyone the global nature of energy markets. Many people can now recognise the importance of the interconnected markets, can talk knowledgeably about LNG (liquified natural gas) cargoes from the US and the importance of the French nuclear fleet to European and UK prices.
There is also widespread recognition of the volatility associated with these markets which can spike within day and react to events (eg unexpected outages), economic conditions (eg demand destruction) and government policy (eg China’s Covid lockdown). The significance of weather risk has never been greater, not least with the increasing reliance on wind and sun in the generation mix. All the uncertainty drives volatility and higher price risk premiums- something that will not go away anytime soon.
The falling prices that are currently being met with a sigh of relief, can relatively easily be explained by a range of factors:
– The weather gods have been kind. Europe has had a relatively warm winter which means that all the work done to fill gas storage ahead of winter is now reaping benefits. Gas remaining in storage at the end of winter is relatively high, which means that, if there is not a heat wave in the summer, we should be able to fill storage up again in the run up to winter 2023. The delta in storage needs is nowhere near as great as it was at the start of summer 2022.
– US production of LNG is where we need it to be. The major Freeport terminal is back up and running after the fire in 2022 and currently gas continues to head to the European continent.
– The French nuclear fleet, is largely back on stream after a period fraught with long outages.
– Demand destruction across Europe has been significant, both across domestic and industrial consumption- we have simply needed less gas to operate.
So, if all these factors remain true over 2023, and the weather gods are kind, prices should continue to soften. None, however can be guaranteed.
The risks pushing prices the other way, include a reversal of the positives from winter 2022 but are exacerbated by additional factors:
– Chinese demand, in a post COVID world may well draw LNG away from Europe;
– European demand may bounce back as economic signals become more positive;
– Plant which has been running hard for many months may have unplanned outages;
– Further escalation associated with Russia’s invasion of Ukraine may further impact Russian gas imports.
We can be hopeful that the worst of the crisis is over, but must not relax yet.
Businesses should think hard about their buying strategies and take a measured approach to risk- getting contract structures right and spreading buying decisions has never been more important.
Ultimately the longer term answer, as is now recognised by the Government, is greater energy independence and less reliance on fossil fuels- but we have some years to go until this becomes reality. In the meantime, a close watching brief will be required.
Jo Butlin, WUN Co Founder & CEO EnergyBridge