How Does the Energy Market Decline Affect Your Business?
Over the last few weeks, the energy market has seen a continued decline, with natural gas prices in Europe recently falling to an 18-month low. We want to provide you with a deeper understanding of the factors behind this and how it affects your business.
Above Seasonal Normal Temperatures
One of the key reasons for the market decline is the above seasonal normal temperatures. As the temperature rises, the demand for gas decreases. With less demand from households for gas, the market has seen a significant reduction in prices.
The market will continue to experience this trend until there is a sustained drop in temperatures. This is a crucial factor for businesses to keep in mind when planning their energy procurement strategies.
Firm Nuclear Production
Another contributing factor to the market decline is the firm nuclear production in France, which has increased by 25% this year compared to December 2022 levels. With an abundance of nuclear power available, the demand for gas has reduced. This has resulted in a surplus of gas on the market, leading to a drop in prices. It is important for businesses to monitor the market conditions closely and plan accordingly to take advantage of these low prices while they last.
High Storage Levels Across the EU
Another reason for the market decline is high storage levels across the European Union. For this point in time, storage capacities are at record highs, meaning that there is currently an abundance of gas supply in the market.
High Number of LNG Cargoes Due to Low Gas Demand in China
Additionally, there has been a high number of liquefied natural gas (LNG) cargoes coming towards the UK and Europe due to low gas demand in China caused by COVID-19. This has created an oversupply in the market, driving prices down.
Businesses on Fixed Contracts
If you’re a business with a fixed contract, we recommend that you sign your contract as soon as possible, especially if your start date is in April 2023.
One key dynamic that has occurred is that the Summer 2023 price is now cheaper than the Summer 2024 price. The Summer 23/Summer 24 spread is -12p/th, which is in contrast to previous months.
Backwardation to Contango
The curve is slowly losing its backwardation, where prices now were more expensive than further out on the curve. The curve is moving into contango, where prices now are becoming cheaper than further out on the curve.
This shift is due to the market pricing in comfortable supply fundamentals, even with a cold snap, the price impact is expected to be largely limited, as there is enough LNG and storage to counter.
The Risk of Volatility in the Future
Although prices are at their lowest point since the Russian invasion of Ukraine and lowest since September 2021, there is still a risk of volatility in the future.
Once LNG supply diverts to China, the UK/European market will be left with no new gas source, and the market will return to volatility. The only thing that can contain volatility is warm weather.
Price Floor and Upside Price Risk
Currently, we have reached a price floor, where there is potentially more upside price risk than downside for the winter contracts.
However, an upward trend is on the cards at some point. The economics suggest this based upon the price levels businesses across Europe begin increasing production, following a winter of demand destruction.
This will increase gas demand, and prices are now at levels where industrial users in Europe will begin producing again. Additionally, the JKM/TTF spread has increased. The Asian price for LNG has risen compared to the European, and we will start seeing some LNG cargoes go towards Asia, reducing gas supply. At these price levels, gas is more profitable to use in Europe than coal, increasing gas demand.
How This Affects Your Business
It’s essential to understand how the market decline affects your business. If you’re a business with a fixed contract, we recommend that you sign your contract as soon as possible to lock in a low price. Additionally, it’s a good time to buy before prices increase again, because at the moment they are at a price floor, especially for the winter months.
In conclusion, the energy market has been in decline due to above seasonal normal temperatures, firm nuclear production in France, high storage levels across the EU, and a high number of LNG cargoes.
Despite this decline, prices are expected to increase again in the future due to various economic factors such as increased gas demand and supply constraints. This makes it a good time for businesses to purchase energy contracts before prices rise again.
At NGP, we can provide businesses with the expertise and market knowledge needed to navigate price volatility, manage risks, and optimise their energy portfolios. By working with NGP, businesses can lock in gas prices, manage and mitigate their risk, and ensure that they have access to a secure and affordable energy supply.
If you would like to learn more about how NGP can help your business with energy procurement, please visit our website at ngpltd.co.uk or contact us at: email@example.com.