Energy Focus - August & Early Winter Energy Outlook

Demand

UK demand ticked up during July with temperatures sitting above the seasonal norm for most of the month. Increased cooling demand, a subdued renewable picture and European gas supply concerns have narrowed the spread between day-ahead and month-ahead pricing.

The demand picture for winter will mainly be driven by domestic demand for heating. Whilst weather forecasting may only give us an accurate temperature picture in terms of days, we can observe global climate phenomena to gain insight into what the winter months could bring. Current modelling shows a 60%+ chance of a La Nina event in the Northern hemisphere in early winter. Typically, La Nina years are associated with cooler weather conditions and increased snowfall in the Northern Hemisphere. We expect market reaction to cold weather to be even more exaggerated during winter 2022/23, given European supply concerns. There is potential for demand to be reduced, due to high prices, but cold weather will still result in demand pressures.

Beyond the usual winter stresses on the UK gas and power networks, we expect continental export demand to remain high during winter, which will add further pressure to the system.

Supply

The UK gas supply picture has remained healthy in recent weeks with continued LNG imports and strong Norwegian flows. Renewable generation has generally been just below seasonal normal levels.

There is concern that LNG imports into the UK could be slowing, with no arrivals yet scheduled for August. Strong competition from European and Asian gas hubs, coupled with the ongoing outage at the US Freeport LNG facility, is likely to remain concern going into winter.

Norwegian flows are expected to fall as we reach mid-August as the maintenance schedule picks up until the end of September. Norwegian gas remains a stable supply source for the UK, but any unplanned outages or strike action could result in significant upside during the winter months.

Between 1.1GW and 1.8GW of British nuclear capacity will be consistently offline for maintenance until the end of this year, adding further tightness to the winter supply picture. There is also increasing concern around the French nuclear fleet, an integral part of Europe’s power supply, as over half the country's reactors remain offline for maintenance or safety reasons.

Geopolitical Risk

European gas supply concerns remain the number one driver across the UK and European markets. Russia cut Nord Stream flows to less than 40% in mid-June, citing a missing turbine that had been held in Canada following maintenance work. The turbine is now on its way back to Russia but timescales, and whether flows will increase upon its return, remain uncertain. In recent days, Russia has announced Nord Stream flows will be reduced to just 20% of capacity as another turbine undergoes maintenance work.

Russian gas flows will remain a key risk factor throughout this winter. The fast-paced and uncertain nature of developments means significant risk premiums continue to be built into prices. Reduced flows, outages, or negative political developments, during the winter period, have the potential to cause price spikes that could far exceed those seen previously.

Wider Commodities

Rising global economic fears continued to mitigate upside price action, from a squeezing supply picture, to keep the wider commodity complex rangebound throughout July.

Global oil supplies are set to remain tight, especially given concerns around OPEC+’s capacity to step up production. Demand is forecast to surpass pre-pandemic levels in 2023, as China continues to ramp up consumption following multiple covid lockdowns. However, high prices, particularly on the back of the strong US dollar, coupled with global economic concerns will continue to moderate prices.

Similarly, economic concerns continue to cap demand-driven gains on carbon markets. If EU countries mandate demand reduction this winter, the economic impact on the Eurozone would be significant. However, as Europe continues to increase coal-fired power generation, to reduce reliance on Russian gas, prices could remain supported despite the downside provided by a weaker Eurozone economy.