Weekly Energy Market Update – 20 January

Gas

Gas prices fell heavily again last week with contracts across the curve falling to new lows. Price drivers for the market are unchanged with the extent of oversupply and strength of fundamentals continuing to weaken prices. Balance of Winter and Summer 20 prices fell 7% across the week, with losses continuing today. The Summer 20 contract has dropped nearly 40% in the last three months. The oversupply is being driven by record storage stocks in the UK and Europe. Unseasonably mild temperatures so far this month, coupled with very high wind levels have depressed demand.

Meanwhile record LNG imports have balanced the gas system with minimal use of storage withdrawals or Interconnector imports from Europe. Price falls this winter have been strongest for the Summer 20 contract, which anticipates very limited injection demand and an inability to absorb excess supply during the milder months. The strength of losses in short-term contracts have now brought down the rest of the curve with seasonal 2021 contracts down 5% across the week, breaking below their previous December lows.

Gas demand has risen sharply today with consumption rising around 80mcm from last week, as temperatures briefly drop to below seasonal-normal levels. Lower wind output of under 5GW this week is also increasing gas for power generation. However, the demand is being comfortably met by supply, notably from LNG, which has risen to more than 130mcm to match the higher demand. This underlines the strength of flexibility within the gas supply system. Milder, windier conditions are returning at the end of the week.

Power

In the power market, contracts on the curve are following the gas market lower, reflecting the declining costs of gas for generation. Very high winds pushed Day-ahead power prices to new lows of £32/MWh but the prompt has risen across the week in anticipation of higher demand from lower winds and colder temperatures this week.

Wind generation across the week was consistent at over 8GW, reaching highs of 14GW as Storm Brendan swept across the UK. Power demand is expected to rise this week as temperatures have dropped to below seasonal-normal levels with wind output as low as 2GW. However, the extensive gas supply flexibility offered by record storage stocks, LNG and Interconnector imports is weighing heavily on prices.

Prices across the curve are down 3% week-on-week. However, the losses in the power market are more gradual than the corresponding gas contracts. This is the result of price support from rising carbon prices, protecting the power curve from further losses. Carbon costs pushed above €25/tCO2e last week, to new highs for the year.