Just how high can the UK energy markets go?
Over the last eight months, we’ve seen the UK’s energy markets rocket upwards at rates that haven’t been seen since 2008. Because of this, we’ve been taking a look at a lot of historic data to try and understand how high this market is likely to go.
Currently, the UK electricity year ahead prices are at £60.27/MWh – 24.4% above a 13-year average, which sits at just £48.43. This may seem like a significant jump up, but we’re currently sitting 35.4% lower than the record highs that we experienced in 2008 with prices topping out at £93.27/MWh.
So, we’re above average on costs but we aren’t breaking any record highs… yet!
To understand what we could be expecting, we took a good long look at market data going back all the way to January 2005. Here’s what we found:
Figure 1 – Global Commodities vs UK energy prices
The first thing you’ll notice from Figure 1 above is that electricity, gas, Brent crude oil and European coal prices all follow very similar trends. You’ll also notice the huge spike in 2008, caused by crude oil and coal creating long-term highs at $143/bbl and $218/t respectively. This was a result of low oil production from the US and OPEC, with strong global economy, which pulled up the price of UK energy contracts. It fell off very quickly though, following a realisation of oversupply, rising global oil storage and a crash in UK equity markets.
Prices rose again between 2009 and 2015 for the UK energy market, supported by rising crude oil and coal prices (see the trend here). However, this was further supported by the Tsunami in Japan which led to the Fukushima disaster in 2011. Prices then remained consistent, closely following crude oil prices, until 2015 when markets began to turn.
Throughout 2015 and into the start of 2016 we saw a continual fall in both crude oil and coal, which was the result of increased production in the US and OPEC leading to a strong global oil oversupply. Inevitably, the UK energy markets fell in line with this change.
Until 2016 that is, where we’ve had a continual rise in prices, in line with crude oil and coal. This price was pushed higher amid OPEC withdrawing 1.8 mbpd of their oil production to reduce the global oil glut. During this time carbon prices were also driving up rapidly – increasing by 523% from September 2016 to September 2018 – and has been extremely volatile, with price changes as drastic as 17% within 24 hours, while remaining generally elevated. As a result, this has led to UK electricity fluctuating in unforeseen directions and by unusual amounts.
Figure 2 – UK natural gas storage vs UK energy prices
Now we shift things and look at the correlation between UK natural gas storage and UK energy prices, looking at 2011 through to October 2018. What you can see here is that between 2011 and 2016 the UK’s gas storage was always close to 100% going into winter and therefore didn’t affect the UK’s energy prices.
However, over the last few years, the storage levels have been considerably less with 2018 currently being at the lowest point we’ve seen over the last six years when going into the winter period. The Energy and Utilities Alliance (EUA) pointed out that recent winters have been quite mild and therefore the market hasn’t come under strain when Rough was unavailable.
That said, the EUA has expressed concern that the UK could be left exposed if a pipeline went down unexpectedly or if LNG shipments were disrupted, leading to a strong belief of greater volatility for gas prices this winter. Similarly, the UK may be about to receive a large quantity of LNG shipments with the possibility of four arriving into the UK within the next week.
What does this all mean?
Well, that’s the big unknown, isn’t it?
On one hand, if things continue as they are then it could be possible that we see the price rise up to the figures seen back in 2008. On the other hand, if we do receive large LNG shipments and a few other price indicators change to strengthen it further then we could see the price fall to long term averages at £48.43/MWh.
At amber energy, our energy procurement and trading teams are constantly monitoring and predicting change in the UK energy markets. We check, make sure and then check again in order to procure commodities at the best possible price. The last year shows with no uncertainty why you need to be talking to an energy consultant up to two years in advance. As the market has shifted so much, getting the best price on energy right now will still be at a significantly higher price than just eight months ago.
If you’re worried about the price of your business energy, then send us a message to find out what we can do to help you.