Energy Market Trends: August 2023

Gas

UK Gas markets have been highly volatile across curve following the announcement of potential Australian LNG strike action at three facilities which accounts for around 10% of global LNG supply. This supported all contract periods with the front season appreciating by 23% from the announcement. Strong declines have been observed from the 22^nd August as an agreement in principle was reached between the Union and Woodside LNG who own the North West Shelf platform. Negotiations with Chevron who own the Gorgon and Wheatstone facilities representing 6.5% of global LNG supply remains unresolved with potential strikes to commence on 7^th September if no agreement is reached.

Further supply tightness is linked to some planned Norwegian maintenance which is set to peak on 6^th September that will cause disruption to UK imports as Norwegian exports will drop to 260mcm/day in September from 285mcm/day in August. A premium Asian LNG market also represents some risk for European supply during peak winter as TTF/JKM spreads are wider in the future months whereby tighter spread would be required to continue to attract U.S shipments.

However, in the near-term market fundamentals are bearish as UK demand remains below the 6-month rolling average with similar trends also observed in Europe. UK and European storages are also at record highs for this time of year whereby shrinking available storage capacity is incentivising market participants to move gas volumes to Ukraine where ample storages are available.

In the wider market Brent oil continues to be pressured by strength in the U.S dollar and weak economic data following declines in Euro Zone business activity particularly in Germany while the UK remains in danger of falling into a recession. On the supply side Iran’s output is set to increase by 3.4mbpd amid voluntary OPEC+ supply cuts which is limiting price declines.

Power

The movement in UK Power prices are parallel to fluctuations in the gas market with the front season shedding around 11% over the past week. Recent declines are linked to improved sentiment in the potential Australian strikes action although negotiations continue which is keeping some uncertainty in the market. UK nuclear output improved by 1.1GW over the past week, providing an improved generation picture. French nuclear output has also improved to 63% of available capacity.

Last week EDF warned of a likely impact on generation at two nuclear sites on the River Rhone due to cooling water restrictions however as concerns around the heatwave ease, this should provide comfort moving into September. The expedition of a planned outage on the 2GW IFA interconnector will see capacity reduced to 50% from 23^rd August to 6^th October, which consequently saw an auction for September capacity cancelled. In other news a new 2GW subsea power link between Scotland and England will be developed, which will be enough to power 2 million homes. Construction is expected to begin in 2024 and should be operational by 2029.

UK and European carbon markets have seen some convergence in pricing with EUA’s shedding £1.91/tonne and UKA’s increasing by £4.84/tonne over last week. Reduced auction volumes have been supportive however signals from weather forecasts are slightly bearish along with technical indicators pointing to a reversal of the recent bullish trend. Furthermore, the commitment of traders data showed investment funds trimmed net short positions by 6.55Mt from 11Mt from the previous week.

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