August 2017: Wholesale gas prices 30% higher than last year as increased volatility puts pressure on prices for winter ’17

Keith Donnelly

Keith Donnelly

Senior Energy Analyst
04/09/2017

Wholesale gas prices in August reflect a dramatic change in market trends so far this year. According to this month’s Vayu Energy Report, a proprietary market review and forecast for Ireland’s wholesale gas, electricity, wind energy and market pricing, current energy prices have confirmed fears first raised in Vayu’s April and subsequent reports regarding the volatility on the NBP, as prompt gas prices have increased by 33% in the last few weeks.

The market has recovered much of the value lost over the year to date, with prices back at levels last seen in late February. The strong euro, with the EUR: GBP exchange rate hitting an eight year high, has tempered some of those gains. On a global level, increased levels of Liquid Natural Gas (LNG) have influenced prices downwards due to higher production rates. However, the UK is currently not seeing much of this glut landing at any of its terminals as cargos are heading for the higher priced Asian markets.

Supply issues in Norway have resulted in the level of gas being supplied into the UK being less than the demand, which had a significant impact on the wholesale gas price. From February to July ’17 gas prices steadily declined, but the Norwegian supply issues have seen the market move from strength to strength, with the market reversing the losses from the previous five months by the end of August representing a 14% increase from July.

Additional bullish sentiment is being felt in the wake of Hurricane Harvey. Oil production and refining facilities in the Gulf Coast region of the United States have been shut down as a precaution, equating to almost 15% of the US refining capacity. Oil markets are expected to keep the bullish tone as long as refining capacity remains impacted, as a result of the hurricane.

Commenting on the report Vayu Senior Energy Analyst, Keith Donnelly, said: “We are anticipating considerable energy price volatility this winter, which could be worrying for businesses as this is the time when their energy usage is at its highest. With the Rough Storage facility in the UK closing earlier this year, the current supply issues and niggles have already seen the winter gas prices increasing by 8% over the last six weeks’. If Irish businesses enter this period without some hedge against the risk of rising prices, the volatility could lead to significant price shocks.”

Mr Donnelly continued: “While gas storage is a concern, injection rates are currently on track to make the month on month gains the largest ever seen in Europe, with some of the highest ever seasonal injections. The high injection rates are helping to flatten the curve with traders believing storage holders are injecting now and already selling gas for Q1 2018.”

Mr Donnelly added: “Supply issues, in particular the lack of confidence currently seen in Norwegian supplies, is causing gas prices to increase. Further maintenance is scheduled at the Norwegian Kollsnes processing facility for September and if it overruns, the volatility seen in August could be replicated. This could lead to European storage holders meeting demand with their stocks, causing further bullishness on the markets. Additional bullish sentiment has been inevitable in the wake of Hurricane Harvey as oil markets have gathered some momentum. ”

Market Overview

In euro terms, Irish wholesale gas prices are 30% more expensive on average this month compared with August 2016. The market has recovered a lot of the value lost over the year to date so far with prices back at levels last seen in late February. The strong euro has, with exchange rate hitting an eight year high, tempered some of those gains in euro terms.

Ongoing supply issues at gas fields and processing plants, (particularly at Kollsnes), have caused day ahead prices to gather momentum. On the curve, winter prices have also rallied as prices react to a weak exchange rate and the supply uncertainty.

The average day ahead price for gas, the contract for gas delivery tomorrow, is 1.59 c/kWh (cents per kilowatt hour) for August so far. This compares with an average price of 1.22 c/kWh in August 2016.

Irish wholesale gas prices are 2% lower (in euro terms) compared with the average monthly price recorded for August over the previous three years (2014 – 2016).

Electricity and Wind Energy Update

The average wholesale price of electricity in the Irish market so far in August is 4.16 c/kWh, an increase of 15% compared with August 2016 and up 4% on last month. The increase in prices can be attributed to the rise on the gas market, while the recovery of wind generation compared with last month has greatly limited that rise. Wind generation as a percentage of total generation has risen by over 40% compared with wind generation last month.

 

Total wind generation capacity in Ireland now stands at 3,916MW. Wind energy has accounted for approximately 21.8% of overall electricity generation on the island of Ireland so far this month, reaching a peak of 2,613 MW on 16th August. This peak generation had the potential to meet 60% of total electricity demand on the island of Ireland at that time. 

ENDS