UK NBP natural gas prompt prices settled higher, with the front month Jun-18 contract adding 21.5%, due to colder weather at the start of April and low Norwegian imports keeping prices elevated for the rest of the April to May period, alongside strong IUK exports from the UK to Belgium and multiple UKCS outages towards the end of May. Further support was provided by surging crude oil, coal and Asian LNG prices. Similarly, the Winter-18 contract increased by 20.8% amid soaring prompt UK natural gas, crude oil, coal and Asian LNG prices, as well as low storage levels leading to additional risk premium over fears of short supply during the upcoming winter. Support was also provided by a plunging GB pound versus the U.S. dollar. U.S. Henry Hub natural gas prices firmed by 8.0% amid cold weather at the start of April leading to higher demand, with further support provided by large storage withdrawals and low U.S. storage levels. Asian LNG spot prices jumped 31.4%, driven by rising crude oil prices, which hit three-year highs, alongside rising global LNG demand as buyers swapped oil-linked supplies for cheaper spot cargoes and outages in Angola, which led to supply curbs towards the end of May.

UK electricity baseload prompt prices increased, with the Jun-18 contract up 17.0%, amid cold weather at the start of April leading to strong UK electricity demand, while surging UK NBP natural gas, carbon, crude oil and coal prices kept front month contracts elevated for the rest of the period. The Winter-18 contract added 15.6%, supported by rising prompt UK electricity, UK NBP natural gas, coal, carbon and crude oil prices. Electricity production from the 1,220 MW Hunterston B nuclear power station is going to fall by 40% this year, after dozens of cracks were discovered in the B-7 reactor, which will be shut until 17 November 2018.

Brent crude oil Jul-18 contract settled up 10.4%, hitting $80.50/bbl during the period, high not seen since November 2014, amid strong global oil demand and OPEC oil cuts reducing the global glut. Risk premium was added to prices following an air strike on a Syrian chemical facility by the U.S. and its allies at the start of April. Further support came from the Venezuelan crisis and U.S. President Trump stating the U.S. would impose harsh sanctions on Iran. Price increases were capped by rising U.S. production and inventories.

European coal for 2019 delivery firmed by 14.9% amid cold weather in Europe and higher Asian coal demand, with India’s and China's coal imports rising as utilities boosted their purchases to replenish inventories after colder-than-usual winter that drew down fuel stockpiles. Prices were also supported by Indonesian coal production falling by 9% year on year and lower Chinese hydro power output.

EU carbon Dec-18 contract increased by 12.3%, rising to the highest level since September 2011 at €16.59/tCO2 towards the end of May. Prices were driven higher by rising oil, coal and European power, as well as strong buying interest, positive auction results and increased speculative options trading amid a belief that the upcoming market stability reform will result in higher carbon prices in the future.

The GB pound remained unchanged versus the euro and lost 5.1% against the U.S. dollar, initially rallying on a reduction in Brexit risks as a worst-case scenario dissipated, as well as falling unemployment, rising retail sales and good UK manufacturing PMI data. Later in April and May, the GB pound fell due to the UK services PMI hitting the lowest level since the Brexit referendum, as well as pressure from subdued UK wage growth, poor industrial production, slow GDP growth, falling inflation and low UK interest rates.

UK temperatures averaged 11.2°C during the April to May 2018 period, 1.2°C above the seasonal normal average, while the local distribution zone (LDZ) demand averaged 112.2 mcm/d, which was 6.3 mcm/d (5.3%) below the seasonal normal demand.

On 10 April 2018, the National Grid released their Summer 2018 outlook. The report presented a view of the supply and demand picture for the summer ahead. The main points were the overall electricity and natural gas demands will be lower than in 2017, with the peak electricity demand for the high summer period predicted 2% lower than in 2017 and the UK gas summer demand expected to be 2.5% lower. However, extended maintenance, reduced storage capacity and intermittent renewable generation will present challenges.

Our predictions made in the last report were directionally in line with the market development. We expected the UK NBP month ahead natural gas price to rise by 0.9% and Win-18 to firm by 1.5%, while prices increased by much higher 21.5% and 20.8% respectively. Similarly, we forecast the UK month ahead electricity baseload contract to rise by 1.1% and Win-18 to increase by 1.1%. Electricity prices exceeded our forecasts by closing up 17.0% and 15.6% respectively.

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