Volatility and a strong bullish trend returned to the energy market during September as a number of factors converged to push up prices. Gas prices rose nearly 7% to 1.39 p/kWh whilst power prices also increased 9% to 4.55 p/kWh. Coal prices were up 11% to $65.20/ton and a late surge towards month end saw oil prices climb to $49.00/barrel.
Concerns over the winter supply/demand balance in the power market, together with unexpected outages in both gas and power plants resulted in a series of spikes in the power market. At one stage day ahead prices for power peaked at over £1000/MWh, amid unplanned nuclear outages and low wind production, meaning that high cost generation was called upon to fill the demand gap. It is already anticipated that the electricity supply margin will be at its lowest ever level this winter.
The gas market was also affected by a fall in imports from the Langeled pipeline, increased demand from gas fired electricity generation, a fall in LNG arrivals into British terminals and the weakening of the pound Sterling which pushed up the cost of imported gas. The Government’s latest announcement giving slightly more detail over the start of the formal Brexit process before the end of the first quarter of 2017 has further impacted on the weakness of the pound.
OPEC reached an informal agreement amongst members to cut crude oil output to between 32.5 to 33 million barrels per day down from 33.25 million bpd. This is likely to be formalised during a meeting planned for late November in which each member country will agree its production level. OPEC will then seek support from non OPEC members. Although this had an immediate short term impact and sent the oil price over the $50 mark there is some doubt that in the longer term this proposed reduction in output will have a significant effect given that exporters across the world are producing at near record levels.
In geopolitical terms the US election in November is fuelling uncertainty in the global economy with the two presidential candidates presenting very differing views of the US economy.
Altogether a period of considerable uncertainty which is likely to continue well into Q4 of 2016, but it is nevertheless worth remembering that in a recent historical context electricity and gas prices continue to represent good value.