Welcome to our latest energy market insight for March 2022. We hope you find it helpful and informative.
With Russia’s invasion of Ukraine dominating the news cycle, there’s a good chance the headlines of this month’s market narrative will already be familiar to a majority, for all the wrong reasons. Here we will take a look at the latest market position, as well as outlining why the UK market is so dependent on Russian gas flows to Europe, despite it only physically accounting for around 5% of UK gas consumption.
Natural Gas Prices
Last week saw UK wholesale gas prices hit all-time highs, peaking at 800p/Th, amid uncertainty regarding Russian sanctions. Many still fear Putin may “weaponize” gas, ceasing flows into Europe. However, markets calmed somewhat once more pragmatic sanctions were confirmed, and gas continued to flow strongly from Russia throughout. This week has seen more stability (a relative term of late) and the market is currently dipping below the 300p/Th mark, albeit almost six-times higher than a year ago. At time of writing oil has also just fallen back below $100 a barrel. The below table, provide courtesy of Gazprom’s UK trading desk, shows where markets opened on 15th March:
As you can see, summer prices are currently trading at a premium to winter prices. This is due to European gas storage sitting below expected levels ahead of summer injection. Plus, the European Commission has announced requirements for gas storage across the EU to be at least 90% filled before 1st Oct each year.
The UK sources only around 5% of its gas from Russia (we get about half from the North Sea and a further third from Norway, with most of the balance arriving as LNG cargoes). But we continue to be affected by the extreme volatility of global markets. The EU relies upon Russia for around 40% of its gas imports, and the UK competes for LNG deliveries in a truly global marketplace. We have seen prices falling from last week’s highs, spurred on by ceasefire talks between Russian and Ukrainian negotiators, and aided by increasing Covid cases in China which may prompt local lockdowns and a consequent drop in energy demand from the region. But we would be foolish to expect anything other than choppy waters ahead while war continues to be waged in eastern Europe.
The UK is reliant upon gas for heating 85% of our homes, and gas is used to generate a third of our electricity. Despite this, we have only 8.5 TWh of gas storage capacity in the UK, almost ten times less than Germany. It is no surprise therefore that power markets continue to track the price movement of natural gas:
The above table shows UK baseload prices mid-afternoon on 15th March, and the graph tracks month-ahead baseload across the last year. Just as with gas prices, we have seen downward pressure in the past couple of days. And, just as with gas prices, the market looks with fearful eyes toward Ukraine for future direction.
They say markets hate uncertainty, and nothing causes greater uncertainty than war. It would be a brave analyst who attempted to forecast what happens next. Let us therefore look at the last 12 months and what impact this will have for those with forthcoming contract renewals.
The above graph, provided by SSE, shows movement in gas and power prices across the last year, based upon a 12-month flat average of forward pricing out of April and Oct. On this basis, the current wholesale price of electricity from April is £243/MWh, adding more than 18p/kWh to your unit rates versus a contract sourced exactly 12 months earlier.
And the above is based solely upon wholesale price movement; in today’s volatile market there are many suppliers declining to quote for new business, and those that will are adding significant premia to their rates in order to hold a price long enough to be accepted. Additionally, all suppliers seem to have increased credit thresholds, with several withdrawing from certain market sectors altogether. But these issues are undoubtedly peripheral to the war in Ukraine, and we all hope peace returns to the region very soon.