Understanding the Energy Market: Why Now is the Time to Act

The energy market is a dynamic entity, constantly influenced by a myriad of factors. As we navigate through these turbulent times, it’s essential to understand the current landscape and make informed decisions. Here’s a breakdown of the current situation and why acting now could be beneficial: 

Market Dynamics 

The energy market is currently experiencing a phenomenon known as backwardation, where future prices are anticipated to be lower than the current spot prices. This typically suggests a market expectation of ample supply or reduced demand in the future. However, a shift towards contango could be on the horizon. In a contango situation, future prices are higher than spot prices, often indicating tighter supply or increased demand expectations. Such shifts in the market structure can have significant implications for energy procurement strategies and hedging decisions. 

Historical Lows 

The geopolitical tensions following the Russian invasion of Ukraine had a profound impact on energy prices. Since then, prices have reached some of their most competitive levels. This period of reduced prices presents both opportunities and challenges for businesses, as they must navigate the volatile landscape and make informed decisions to secure energy at optimal rates. 

Supply Gaps 

The global energy landscape is witnessing a notable shift in LNG cargo movements. The UK, traditionally a significant recipient of LNG cargoes, is seeing a reduction in arrivals. This is largely attributed to the surging demand in Asia, where countries are willing to pay premium prices for LNG, diverting shipments away from European shores because of a rebound in Chinese demand and heatwaves in Asia increasing gas demand. 

Winter Predictions 

The energy market is inherently sensitive to seasonal changes. A colder-than-expected winter can strain storage facilities, leading to potential shortages. If storage sites run low, the market could respond with price hikes for both Summer ’24 and Winter ’24 contracts, reflecting the increased risk and demand associated with low storage levels. 

Geopolitical Factors 

The global energy market remains at the mercy of geopolitical developments. Speculations are rife about a potential ban on Russian LNG in Europe in the coming months. Such a move could have cascading effects on supply chains, prices, and energy security for many European nations. 

Unaccounted Risks 

While current prices might seem attractive, it’s crucial to remember that they may not have fully accounted for potential supply shortages in the future. As we approach these critical periods, especially with the backdrop of geopolitical tensions and supply chain disruptions, prices could see a significant uptick. 

Existing Concerns 

The French nuclear fleet, a critical component of Europe’s energy infrastructure, continues to face challenges. Any disruptions or extended maintenance periods can send ripples through the market. Additionally, the recent extended maintenance of Norwegian assets underscores the market’s vulnerability to supply shocks. 

Potential Cost Implications

To provide a clearer perspective, let’s delve into some numbers. Depending on the supply scenario, businesses could either save significantly or face increased costs: 

Comfortable Supply Scenario

If prices decline by 20%, businesses could see savings. For instance, a company with a 3 GW consumption could save approximately £24,483 annually. 

Tight Supply Scenario 

If supply tightens and prices rise by 40%, costs could rise. The same 3 GW company might face an additional cost of £48k per year. 

Extreme Tight Supply Scenario 

In a scenario where supply becomes extremely tight and prices rise by 80%, the costs could skyrocket. Our 3 GW example could see an added expense of £98k annually. 

Here’s a quick reference table for different consumption levels: 

The energy market’s volatility highlights the importance of staying informed and making timely decisions. Whether you’re looking to lock in a rate or strategise for the future, understanding the market’s nuances is crucial. 

NGP Flex 

In this current energy landscape, businesses need a trusted partner to help navigate the complexities of energy procurement.  

NGP is Europe’s leading energy consultancy, with a proven track record of assisting thousands of businesses in successfully navigating the complexities of energy procurement. Our expertise and market knowledge are unparalleled, and we are committed to helping our clients optimise their energy portfolios and achieve long-term stability.  

At NGP, we understand the importance of a tailored approach to energy procurement. Every business has unique energy needs and risk tolerances, so a one-size-fits-all approach may not be ideal.  

We offer flexible energy procurement strategies that align with each company’s specific objectives, industry, and risk profile, providing a more effective and customised energy management solution.  

Our flexible energy procurement strategies not only help manage costs but also encourage businesses to evaluate and optimise their energy consumption patterns. By monitoring usage data and market trends, we can identify inefficiencies and implement improvements, ultimately resulting in more sustainable energy use.  

We understand that the energy market is notoriously sensitive to supply shocks and is influenced by global events. Our team of experts keeps a close eye on these factors, providing businesses with the market intelligence and real-time data they need to make informed purchasing decisions. This proactive approach allows businesses to mitigate the risk associated with market volatility and potential supply shortages. 

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