Energy Market Update - 01 October 2024
The UK energy market has opened lower today, reversing yesterday’s gains as milder weather eases supply tightness, despite ongoing supply concerns.
Gas prices have seen an upward trend recently, supported by low LNG imports, minimal storage injections, and extended maintenance at Norwegian facilities. This morning, however, prices softened following milder weather forecasts, which reduced demand and alleviated some concerns about supply shortages. Despite this, the UK gas system remains 9 mcm short, while LNG send-out has increased to 29 mcm, with two cargoes expected this week. This modest boost in LNG supplies has helped ease market pressure for now.
Geopolitical tensions in the Middle East have intensified overnight, significantly impacting energy markets. The risk of broader regional conflict has escalated, particularly with the potential for an Israeli Defence Forces (IDF) incursion into southern Lebanon. This development has raised concerns about potential disruptions to gas supplies from the Middle East, a region critical to global energy flows. Although the immediate impact on physical supply remains limited, the uncertainty is causing market participants to be cautious, with fears of supply routes being compromised or further disruptions to LNG shipments via the Red Sea, which has already been a restricted zone for energy cargoes. As a result, both UK and continental European markets have reacted, with gas prices rising across the curve. Yesterday, Q4 2024 UK gas contracts saw the most significant movement, climbing by 1.19p/therm to settle at 96.36p/therm.
The broader energy market has also been influenced by fundamental supply constraints. With Russian gas supplies to Europe severely reduced, and ongoing unplanned outages like the one at the Asgard field in Norway, the market is facing tight supply conditions heading into winter. European gas storage is currently 94.28% full, providing some buffer, but market sentiment is increasingly cautious as cooler weather could trigger early withdrawals from storage. The likelihood of a La Niña event, which could bring colder-than-normal conditions later in the year, adds further risk to the winter outlook.
UK gas demand for power generation has risen due to a forecasted drop in wind output, which is expected to persist through the week. Spot gas prices are currently at 92p/therm, while UK Day-Ahead baseload electricity prices stand at £71.78/MWh. On the broader energy front, Brent crude remains stable at $71.77/bbl, but any significant escalation in the Middle East could drive oil prices higher. Coal prices, meanwhile, are trading at $124.38/tonne, and EU carbon allowances are priced at €65.56/tonne, reflecting a continued emphasis on decarbonisation efforts across Europe.
As tensions in the Middle East continue to rise, markets are keeping a close watch on any developments that might further disrupt energy flows, particularly with regards to LNG shipments and other key energy commodities. While Europe’s gas storage is well-prepared for the start of winter, the region’s ability to manage a prolonged cold spell or significant geopolitical disruption remains a key concern for market participants.