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Energy Market Update – 17th May 2018

Key Points:

  • UK Electricity Win-18 contract is trading at a 6 year high.
  • UK Gas Win-18 is reaching a new high, matching winter prices from 2014.
  • Brent Crude breached the level of $80/bbl and continues to rally.

UK Electricity Prices:

UK Electricity Day Ahead moved up this morning on the back of rising gas prices. Day Ahead is currently trading at £56.00/MWh, up by 3.3%, whereas Month Ahead is at £55/MWh, up by one 1.6%. The power generation mix is largely composed from Gas today (44%) and Nuclear (17%).  Wind generation dropped to 6.5%. With the weather conditions improving from tomorrow, we would expect electricity prices for near delivery to drop, amid falling demand.

Further out the curve, seasonal contracts also surged. Win-18 is trading above £61/MWh. This is the highest seasonal price over the last 6 years. European Coal contracts for delivery in 2019 moved up overnight, amid rising demand from China.  Carbon emissions also soared in line with the rising gas and electricity market. Despite the Pound getting stronger against the Euro, UK electricity prices are still soaring. The currency effect has little impact on the commodity wholesale market, amid some strong fundamentals such as rising gas and electricity prices and uncertainty around the geopolitical situation.

UK Natural Gas Prices:

Yesterday, UK gas prices had a bit more breathing space, so the majority of contracts were trading lower. Unfortunately, today is another day of rally. The cooler weather pushed Day Ahead Gas prices higher this morning on the back-rising demand and tight supply. The system was about 6 mcm undersupplied. As a result, National Grid withdraw Gas from medium range storage. Day Ahead is currently trading at 57.90 p/th, reaching the same price level seen in March this year. Month Ahead is at 55.65 p/th and the contract is looking to meet the Day Ahead price range. In other words, the UK gas prices for a short terms delivery are trading at the level typical for the winter period.

Further out the curve, seasonal contracts has also surged. Win-18 gas prices are at the level of winter 2014. The contract is currently trading 1.83% higher than yesterday amid the bullish sentiment from oil markets. The oil surged overnight, after the EIA agency reported higher than expected withdrawal from the U.S inventories.

Macroeconomics:

With Brent Crude and WTI soaring over $80/bb and $72/bbl, we see a more and more adverse effect on macroeconomics. The U.S government borrowing costs continued to move upwards, amid the rising cost of oil. Ten-year U.S. government Treasury yields, which are a key driver of global borrowing costs, neared a 7-year high of 3.12 percent as higher oil prices pointed to higher inflation and followed Wednesday’s upbeat U.S. retail sales numbers.

Strong oil prices lifted shares in UK majors and helped Britain’s FTSE stay afloat on Thursday while online grocery retailer Ocado (LON:OCDO) hit a record high and was set for its biggest rise ever after signing a deal with U.S. grocer Kroger (NYSE:KR).

In the currency markets, sterling rallied against both the Dollar and the Euro after a UK newspaper reported that Prime Minister Theresa May would tell Brussels that Britain was prepared to stay in the European Union’s customs union after a transitional arrangement beyond 2021.