Flexible Energy Contracts: Adapting to the Market
In the wholesale energy market, a cold weather snap has the potential to significantly impact demand for heating fuels such as natural gas and electricity.
As temperatures drop, households and businesses increase their energy use which leads to a surge in demand. This increased demand can drive up prices in the wholesale market, potentially by around 20%.
Additionally, cold snaps can also affect the supply of energy, as extreme weather conditions can disrupt the delivery of fuels or lead to withdrawals from energy storage. This can further impact prices in the wholesale energy market.
As things stand, any unexpected power supply disruption in the market will have a knock on effect on energy prices. Disruptions can occur from domestic production, Norwegian or LNG cargoes.
China is one of the world’s largest consumers of LNG. Therefore, any changes in demand from China can significantly impact the global LNG market. If China lifts COVID-19 related restrictions, it will likely result in a rebound in economic activity, including increased demand for energy. This increased demand for LNG in China could lead to an increase in LNG prices, as Chinese buyers may be willing to pay a premium for that cargo.
The impact of a rebound in Chinese demand for LNG would be particularly significant for the UK and Europe markets, as cargoes previously destined for China are now coming to Europe. This means that if Chinese demand increases, it could potentially drive up the price of LNG in the UK and Europe, as buyers may be willing to pay more for LNG cargoes that are in short supply.
Earlier in the week (16 January 2023), the energy market witnessed a 10% drop, reaching multi-month lows. For businesses looking to secure a flexible energy contract, this means your budget caps will be substantially lower.
Despite the current drop in the market, it is important to remember that due to the current volatility and uncertainty surrounding energy, a 20% price increase following this could happen at any moment. This is because the market has followed a significant downtrend over the last 6 weeks, and there is an argument to suggest that the market is now due a price correction at some point.
The Sum-23 contract (above) has declined over the weekend, and is now valued at 14.5p/kWh (commodity cost only). The price decline is largely attributed to a comfortable supply picture.
The UK has received 4 LNG shipments over the weekend, with 1.5 days’ worth of winter supply. However, how long the UK will keep receiving these cargoes will depend on China’s COVID-19 policy and any economic changes they see as a result of easing restrictions.
As traders, our position remains relatively simple. If China does lift the COVID-19 lockdown restrictions, causing prices to increase, we would look to hedge some of the volume in your contract.
In sum, signing contracts now will help to reduce the commodity price risk for any business.
If you have any further questions about the energy market or business energy contracts, contact Northern Gas and Power on +44 (0)3 300 300 800 or email our trading desk via: email@example.com