The GB pound has fallen to its lowest level in 31-years against the U.S. dollar with fears growing of a “hard Brexit” from the European Union and the EU’s single market in favour of imposing controls on immigration. Since the UK’s unexpected decision to leave the EU on the 23rd June 2016, the GB pound has fallen by 15.9% against the U.S. dollar and 14.8% against the Euro.
UK energy prices have since risen, with the UK NBP natural gas Winter-17 contract rising by £2.86 /MWh (6.4%). UK baseload electricity contracts have risen more substantially, with the contract for delivery in November-16 rising by £14.43/MWh (31.3%) and in Winter-17 by £4.7/MWh (10.9%). The rise is strongly correlated with the fall of the GB pound against the Euro, with the 14-day annualised correlation between the €/£ and Winter-17 UK natural gas reaching 91%. As the GB pound drops against the Euro, it incentivises continental energy traders to buy UK commodities, increasing the demand for UK NBP natural gas, which is the biggest driver of the UK electricity price.
The surge is further assisted by a bullish crude oil market after months of speculation about OPEC and plans to cap oil output. The 14-day annualised correlation coefficient between Brent crude oil month-ahead and Winter-17 UK NBP natural gas has reached 92.1%.