Weekly Energy Market Update - 10 February

Gas

Short-term gas contracts, notably the Day-ahead and front-month markets, fell heavily again last week, with losses of around 9%. The driving force in the gas market remains the very healthy fundamentals, lower than expected demand and risk of oversupply. A brief spell of below average temperatures and low winds had no price impact, while declines accelerated again when temperatures climbed at the end of the week and wind output surged to more than 13GW as Storm Ciara arrived in the UK.

Flexibility within the gas supply network is minimising the impact of higher demand across the winter, particularly from LNG sendout, which rose above 100mcm again last week. Nineteen tankers are now booked for February arrival. Record low LNG prices across the global market are contributing to a substantial oversupply. Asian LNG prices have more than halved year-on-year as Chinese demand tumbles amid fears over the spread of the Coronavirus.

Higher heating demand this week is likely to be offset by continued high winds, reducing the use of gas for power generation. March and April gas prices are down to 22p/th while the Summer 20 contract has halved in value since the start of winter, falling from 46p/th to 23p/th. Longer-dated gas contracts moved higher, with gains of 3-4% across the week. This was in line with a rebound in the crude oil market, which bounced off one-year lows amid ongoing speculation over the spread of the Coronavirus. Fears over lower demand from the virus has weighed on commodity prices for the last few weeks.

Power

Day-ahead power prices ended the week below £30/MWh for only the third time in ten years as the UK experienced very high wind levels at times last week. Day-ahead prices started the week higher, rising to £37/MWh as weather conditions were cooler with wind output dropping below 2GW. However, as Storm Ciara reached the UK at the end of the week, wind generation jumped to peaks of more than 13GW. On Saturday wind generation averaged 12GW across the day. The strong renewable availability reduced the share of gas in the fuel mix, with CCGT burn halving from 16GW to 8GW in one day.

Higher levels of embedded generation from the strong winds also affected electricity demand. After peaking at 45GW early in the week, peak demand fell to 42GW by Friday. Wind output is forecast to remain consistent around 12-13GW for the first few days of this week. Power prices for Tuesday have dropped to £28/MWh, testing 13-year lows for the prompt market. The
continued declines in the gas market is reducing the cost of gas-fired generation, and driving the front of the power curve to new lows. March 20 prices fell 5% week-on-week with the Summer 20 market hitting new lows at £33/MWh. The rest of the electricity curve saw little change, drawing some support from gains in longer-dated gas contracts and the oil market.