Energy Update – July 2022
Updated: Sep 26, 2022
Energy Buying Information for Hoteliers
With the war continuing in Ukraine, Energy market rates remain painfully high. We strongly advise hotels to obtain professional support and guidance when managing this category.
European energy markets remain heavily affected by the Russian-Ukrainian war. The UK’s energy security plan detailed the government’s plans to reduce dependency on Russian fossil-fuels and become self-reliant in power generation. Although the plans presented a positive outlook for future UK gas supply and prices, it remained certain there would be no short-term fix and prices would remain susceptible to outside influence.
Current European sanctions, including Germany’s decision to halt production of the Nord Stream 2 pipeline, have created long-term bullish sentiments. The latest EU sanctions against Russian coal and a ban on Russian ships entering EU ports have added to volatility across European markets. Last week, the EU announced a new set of sanctions targeting Russian oil imports. The continent will reduce its intake by over two thirds, cutting all oil imports via sea. Although not a complete ban, Putin could retaliate by placing further sanctions of his own on Europe. Gazprom have suspended flows of natural gas to Dutch and Danish clients due to payment disputes.
Gas sanctions could follow but the EU remain reluctant to release any such proposal due to its dependence on Russian supply. Germany, whose economy is heavily manufacturing based, could see large losses to their GDP if sanctions are imposed. The dilemma remains. Income from gas contributes to a large portion of Russia’s monetary resources for its invasion of Ukraine. The threat of retaliation from Russia has contributed to spooking the markets by inflating uncertainty. Despite Ukraine’s allies’ actions, Russia remains defiant in its campaign across Ukraine.
For the best avoidance of risk, it would be recommended to secure a contract as soon as possible with extreme volatility still possible if things escalate further in Ukraine. To reduce the burden of the strength shown for contracts in the closer term, it is advised to contract further out to reduce pricing and spread the risk as longer-term contracts continue to represent better value.
Utility Trading Graphs
Market Conditions / Price Drivers:
Explosion at LNG plant – A fire at one of the biggest LNG plants in America, operated by Freeport LNG, sent European prices sharply higher mid-week. The fire Is expected to halt production for at least 3 weeks, hampering LNG exports from the US. Healthy LNG shipments to Europe and the UK has been the main driving force of softer prices on the near curve recently, keeping the system well supplied at delivery whilst also allowing for strong injection rates. A prolonged shutdown will likely have ramifications for further dated contracts if the loss of LNG is severe.
Oil continues to push higher – Oil markets remained supported last week. The opening up of key parts of China continues to drive demand expectations, while participants continue to see a tight supply picture for the coming months. The decision by OPEC+ to increase output by 50% more than previously is doing little to dampen bullish sentiment as many members cannot increase production.
Increasing LNG demand – The prospect of an increase in Asian demand is likely to divert some tankers away from Europe in the coming weeks as the arbitrage between Asia and Europe right now is not thought to be enough to keep cargoes coming to us in the future; greater bullish impetus will be added by increased demand from France in light of lower nuclear availability.
Coal – The coal market is expected to remain strong over the coming weeks ahead of the EU’s Russian coal ban. Despite close to seasonal temperatures for the UK, continental temperatures have moved into cooling demand territory. Demand is expected to continue to rise the further into summer we go. Along with low French nuclear availability, record low gas flows from Russia and upcoming coal sanctions the outlook remains bleak for coal.
Temperatures – Cooler temperatures in the UK last week compared with previous weeks and lower renewable generation combined to place more burden on the gas system.
Carbon – The benchmark EUA & UKA Dec ‘22 contracts shed significant value during the first half of last week in anticipation of the European commissions vote on Wednesday on the revision to the ETS, CBAM and aviation files. Carbon prices consolidated from Wednesday onwards however, as the market took a breather to assesses what’s next. In an unexpected move, The EU ETS deal was rejected by the European parliament on Wednesday. Although, MEPs voted to revisit the package, but this may not happen until September.
EU Gas storage requirements – Negotiators and lawmakers from European Union countries finally managed to agree on a deal regarding storage last Thursday. Although talk surrounding a deal on storage have been up in the air for some time, they are finally set in stone. The deal dictates that EU countries will be required to fill their gas storage to at least 85% by 1 November this year.
LNG Supply – Supply of LNG remains strong for now but as stated above could slowly become less of a bearish factor if Asian demand continues to pull tankers away from Europe, or, if the Freeport terminal remains offline for longer than initially stated
This information is provided by our HCC Market partners, Assured Energy, who are part of The Consultus International Group. Any information provided is given on an advisory basis and both HCC and Assured/Consultus are in no way liable for any action taken by the reader with regards to their energy purchasing.
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