May 2014 Energy Market Report: 30% Drop in Wholesale Gas Prices

May 2014: Wholesale gas prices continued to fall in May, trading at levels not seen since 2011 due to a combination of strong supplies, weak demand across Europe and a build-up of larger than normal gas inventories, according to the latest Wholesale Market Report from Vayu.

The slump in prices has been driven by consistently lower than average demand for gas over the last six months due to warmer weather conditions and increased shipments of LNG (liquefied natural gas) from major suppliers such as Qatar. This has resulted in substantially increased gas storage levels in the UK market, which is the major source of gas supply into Ireland.

The report shows that downward pressure on prices is set to persist into June. UK gas inventories are currently more than three times the levels at the same point in 2013 and high rates of injection into storage are continuing unabated – incentivised by greater returns when the gas is withdrawn in winter this year.

Day-ahead prices – the contract for gas delivery for tomorrow – finished trading on Friday (23rd May) at 45.8p, down almost 30% since the beginning of the year and 30% lower than at the same point in 2013 also. This weakness has also fed into the lower pricing of gas for the June-2014 contract and other contracts due to expire over the next three months.

Vayu’s senior energy analyst Joanne Daly says: “Strong levels of gas supply mean there is very little risk of a rise in wholesale prices at present. With temperatures expected to remain at or above seasonal normal levels into June, we’re seeing prices for gas contracts further out than one month being dragged down by the prospect of reduced demand and lower requirements to build up inventories.”

Although downward price movements have dominated the market throughout May, gas prices have been slightly choppy since the start of the month with the majority of this volatility coming from escalating geopolitical tensions between Russian and Ukraine. Russia – as Europe’s biggest gas supplier – provides approximately a quarter of continental demand with a third of that coming via Ukraine.

“While markets remain sensitive to the situation in Ukraine and continue to factor a political risk premium into prices, there has been very little upward pressure on prices. In fact, concerns over Russian gas supplies to Europe appear to have further hastened the build-up of inventories in Europe. Storage levels within Ukraine, however, are a cause for concern as current injection rates are considered too low should any disruption to European gas supply materialise.”

Electricity Update

The average wholesale electricity price so far in May is 5.41c/kWh – down 2% from the average during April and down 12% compared to this time last year. The first four months of 2014 saw wind energy continue to make a substantial contribution toward electricity generation in Ireland with over 8,140 gigawatt hours (GWhs) of wind energy generated. This represented 23% of total electricity demand for the country during this period.