EnergyHub Market Report September-2024

Monthly electricity stats

In August, wind emerged as our primary source of electricity generation, contributing 31.8% of the total output. Following closely behind was nuclear power, accounting for 18.2% of the electricity generated.

During this period, an impressive 60% of our electricity was sourced from zero-carbon options, reaching a peak of 87% on August 23rd at 10am. The average carbon intensity of our electricity generation stood at 83 gCO2/kWh. Notably, the lowest carbon intensity was achieved on August 23rd at 11am, with electricity being generated at a mere 25 gCO2/kWh. Coal played a minimal role in our generation mix, representing only 0.2% of the total output, enabling us to achieve an impressive 288 consecutive hours without relying on coal.

The peak demand for electricity occurred on August 28th at 5pm, reaching 29,103MW.

Weather

Northwest Europe is expected to experience a cold spell towards the end of this month and into the beginning of October, before returning to seasonal averages. Windspeeds in the UK are forecasted to increase by the middle of this week and remain consistently above average for the next two weeks. This is likely to reduce the need for gas burning during this time, assuming the forecast remains accurate.

Storage

Rough nominated injections last Friday after returning from maintenance, currently sitting at 1,078million cubic meters (mcm) or 71% capacity. Pan European storage at time of writing is currently sitting at 93.45%, with most major EU storage at over 90%. The UK is currently at just below 60%, but as we all know, the UK has very little storage capacity compared to the EU and relies on the north sea.

Ukraine's underground gas storage facilities are the largest in Europe, with a total capacity of 31 billion cubic meters. The country's vast reserves helped the continent avoid a market crisis last winter. Ukraine's vast natural gas storage facilities can still offer Europe a lifeline this winter even as Russian bombs target the sit. Gas storage facilities in the EU can only hold a maximum of about 100bn cubic metres of natural gas, compared with annual demand in the bloc of between 350 bcm and 500 bcm, depending on the weather and other conditions. Ukraine offered about 10 bcm of additional storage capacity last year, and European entities stored more than 2 bcm ahead of the winter months, as the country offered incentives such as cheap storage tariffs. Thus far we have seen minimum injections from EU nations due to the heightened tensions and Russian bombing this summer.

LNG

The United Kingdom is anticipating the arrival of three LNG tankers from Qatar within the next four weeks, with additional cargoes expected to be delivered to terminals in Northwest Europe.

The European Commission has approved the joint acquisition of France LNG Shipping (FLS) by a consortium consisting of Japanese shipping giant NYK, French shipowner Geogas Maritime, infrastructure fund manager DIF Management, and capital market company Marigold, a subsidiary of Access Capital Partners based in Luxembourg. This acquisition is expected to drive investments in cleaner technologies and expand the presence of LNG in energy markets.

Venture Global, a U.S. producer of liquefied natural gas sourced from North American basins, has secured a 1 million tonnes per annum (mtpa) LNG regasification capacity at Greece's new Alexandroupolis LNG receiving terminal for a five-year period starting in 2025. The establishment of the new South-North Vertical Corridor will enhance Europe's energy security by enabling the importation of alternative natural gas supplies into the region.

Norway and the United States have surpassed Russia as Europe's primary gas suppliers. In the previous year, Norway supplied 87.8 billion cubic meters (bcm) of gas to Europe, representing 30.3% of total imports, while the U.S. supplied 56.2 bcm, accounting for 19.4% of total imports. Despite this, the United States remains the largest LNG supplier to Europe, with nearly half of the continent's total LNG imports originating from the U.S. This marks the third consecutive year in which the United States has been the leading supplier of LNG to Europe.

Infrastructure

The announcement of a possible new transit agreement in Ukraine had a significant impact on prices last week. The existing transit agreement between Russia and Ukraine is set to expire at the end of 2024, resulting in an expected loss of 42mcm/day through the Sudzha interconnection point. However, the potential new agreement would enable the transit of gas from Azerbaijan, offering a promising alternative.

In other news, Gassco has made some adjustments to their maintenance schedule for their assets, but the overall impact is anticipated to be minimal. Maintenance activities on Norwegian assets have also been gradually decreasing, leading to an increase in gas exports to the continent.

Overall, these developments in the energy sector highlight the importance of international agreements and maintenance practices in ensuring a stable and efficient gas supply.

Oil

Oil prices strengthened last Friday in response to the US interest rate cuts announced by the US Central Bank yesterday. Last week, oil prices fell below $70 as there was a general acknowledgment of a global economic slowdown. However, with the Federal Reserve reducing interest rates by half a point and hinting at the possibility of two more reductions in November and December, oil prices have rebounded. As of now, oil is trading at $74. The easing of monetary policy in the US has led to a weakening of the dollar, making oil more affordable.

Geopolitical drives

Is monetary policy truly free from political influence? While central banks operate independently from governments, they are bound by mandates established by those governments. These mandates can vary significantly from one country to another. For instance, the United States Federal Reserve (the Fed) operates under a dual mandate: to control inflation and strive for maximum stable employment. In contrast, the Bank of Canada and the Bank of England focus solely on managing inflation, with a specific target of two percent.

In principle, central banks work towards these objectives without interference from the government. Traditionally, monetary policy revolved around setting interest rates for regulated banks. However, central banks have expanded their role by implementing large-scale asset purchase programs through quantitative easing. This has involved providing support not only to regulated banks but also to investment funds, hedge funds, and other unregulated financial entities known as shadow banks. One of the strategies employed has been the purchase of corporate bonds to stabilize the corporate debt market.

The famous saying, "When America sneezes, the world catches a cold," originally attributed to Prussian diplomat Klemens Wenzel Furst von Metternich, highlights the interconnectedness of the global economy. Issues in the American economy have a ripple effect, impacting economies worldwide as capital flows slow down.

In response to the Federal Reserve's reduction, the Bank of England has maintained its rates and signalled a steady reduction. This has influenced our currency, with the pound now trading around $1.33 to the dollar. Interest rate reductions are viewed as a form of monetary policy easing, which can weaken a country's currency. Therefore, a strategic, gradual reduction in interest rates compared to the Fed could result in a stronger pound and a more significant reduction in inflation.

Following Brexit, the pound experienced a sharp decline from trading around $1.7 to the dollar to dropping below $1.2. By reducing rates at a slower pace than the Fed, we may see the pound strengthen to around $1.4. While still below pre-Brexit levels, this would be a significant improvement compared to the past three years.

The fluctuations in currency values impact all imports, particularly commodities like oil that are priced in dollars. A stronger pound makes oil and its derivative products cheaper. The Federal Reserve has indicated two more rate adjustments before the year ends, while the UK may only see one quarter percent adjustment. This potential adjustment in November could provide consumers with extra spending power for the holiday season.

In essence, the Bank of England could be seen to counterbalance the rise in domestic energy costs with a reduction in import inflation. The careful management of interest rates and currency values plays a crucial role in shaping the economic landscape and influencing consumer behaviour.

Summary

With storage levels looking favourable, a stronger pound, and Norwegian maintenance nearing completion without any major issues, the energy market is showing positive signs. Additionally, the weather forecast is optimistic, with a slight cold spell currently present but conditions expected to return to seasonal norms in the near future.

If you currently hold a short position, now may be a good time to close off any residue. It is unlikely that prices will decrease significantly unless we experience mild and windy conditions until late January. However, if a prolonged cold period occurs before the mid-winter period, we could see a significant increase in the forward curve.

If your energy contract is set to expire soon, I encourage you to reach out to explore how the energy revolution could benefit you. Let's discuss how we can optimize your energy strategy in light of these market developments.

As always, If you would like a more in-depth discussion on any of the points raised, please don’t hesitate to get in contact.