2017 had a volatile start to the year as below average temperatures due to an artic weather system supported prices. This was of particular concern on the continent with the French authorities asking residential customers to limit their power usage in order to avoid a blackout. French hydro stock levels were low and this coupled with reduced nuclear capacity saw the UK-France interconnector exporting at full capacity to France and therefore squeezed margins here in the UK. Gas prices saw further support at the end of January when the withdrawal outage at the Rough storage facility was extended which also coincided with a colder weather run for February.
Early 2017 also brought with it the results of the early capacity auction for Winter-17 delivery and was the lowest price we have seen so far at £6.95/kw/year. This was lower than widely anticipated by the market and the levels we had seen previously, implying that some plants who previously relied upon higher capacity prices to stay online had already hedged healthy dark spreads in the extreme prices seen at the end of 2016. This had a dampening effect on power prices for the coming winter as traders viewed this as an indication that margins would be more comfortable over winter as a result.
After a volatile start to the year, power and gas markets entered a relatively benign period of trading across spring and the early part of summer. Any volatility seen was minimal and was largely driven by movements in the underlying fuels and currency markets as fundamentals were comfortable. The pound continued to be volatile following the Brexit result in 2016 and ahead of the surprise General Election called by the Conservative Party. The resulting hung parliament immediately saw a drop in the value of the pound which has struggled to recover since.
In June we also saw Centrica announce the permanent closure of Rough, the UK’s largest gas storage facility, which was largely anticipated by the market following months of delays to its return to service. This had the impact of softening summer prices as total UK demand would be reduced due to the lack of injection demand but lent support to winter prices. Historically Rough has provided around 10% of winter demand, raising concerns around supply if temperatures were to plummet this winter.
As we moved into summer the underlying fuels broke into a bullish trend which was sustained for the rest of the year. Coal prices took direction initially from cyclone Debbie that impacted Australian production as well as strong demand from Asia, particularly China. The anticipation of a harsh winter in China combined with lower global production levels kept the front year contract supported and also lent support to the power curve. Oil prices also saw similar movements with prices gaining across the summer as the U.S driving season drove up demand and production was heavily impacted by the various hurricanes. Premium was also priced in as OPEC and its allies look set to extend their production cuts to the end of 2018, a decision that they reached at their November meeting. Gains were however kept in check when U.S. production increased for eight consecutive weeks at the end of the year.
The end of the summer was peppered with several unplanned gas outages which raised concerns that the UK may struggle to meet demand in the run up to winter, particularly if there was an early cold snap in October. As a result, the gas system struggled to balance for much of August and the bullish trend which has largely remained in play until the end of the year started. Additionally, from 2016 to 2017, the UK has experienced a slow-down in LNG tankers arriving at the three UK terminals. This dynamic can be shown in Table 1 (below), where the data shows that South Hook has received less than half the amount of tankers in 2017 compared to the previous year meaning the amount of LNG volume coming to the UK was significantly lower in 2017. This has been driven largely by higher spot prices in the Asian market where Japan continue to require gas to replace the nuclear capacity lost during the Fukushima disaster back in March 2011.
Further strength came when the French nuclear authority requested that EDF carry out audits on all reactors manufactured at Areva’s Creusot Forge foundry. Although the requested inspections only involved verification of paperwork, the havoc caused at the end of last year around the French nuclear situation was fresh in traders’ minds and so they were quick to price in risk premiums. As the first inspections were carried out, EDF reported that it had detected almost 500 anomalies in the 12 reactors it had audited but that none of them compromised the safety of the operations of the nuclear units. This ensured nervousness remained around the situation and when EDF reduced their operating target for 2017, the market was quick to respond with a price movement upwards.
A cold spell at the start of December saw near curve prices steadily increase as demand shot above seasonal normal levels due to the increased heating demand particularly from the domestic sector. These gains were further exacerbated following reports from Ineos that they were performing a controlled shutdown of the Forties pipeline after discovering a crack. Forties is an oil pipeline that brings North Sea oil onshore but the closure also resulted in several platforms producing both oil and gas to shut and therefore affected gas flows to the UK. This also coincided with an explosion at Baumgarten, a major gas hub in Austria. Baumgarten is Austria’s largest reception point and the main distribution hub for natural gas imports from Russia, Norway and other countries. It is one of Europe’s most important gas hubs, handling around 40 billion cubic metres per year, therefore significant premium was priced into the prompt power and gas markets after the explosion. The issue with Baumgarten was however short lived but saw the market struggle to rebalance and resulted in a volatile end to the year.