May Monthly Market Insight - Oil prices strengthen as the world starts to reopen

Market Insight: Short-Term

It has been another month of records for prompt and near-curve drivers. The bank holiday weekend saw the grid CO2 intensity fall to its lowest ever, at 33g per kWh, due to strong renewable generation from solar and wind sources. This coupled with low demand, saw the Day-ahead contract average negative £9.92/MWh on Friday 22nd May, this is the lowest 24-hour average ever. In fact, renewable generation has been so healthy, throughout May, that the UK is currently on its 49th consecutive coal free day, another record.

Looking at gas supply, LNG has continued to arrive into the UK and storage capacity remains extremely healthy. Norwegian flows have also remained steady, despite some ongoing maintenance. Several LNG cargos, destined for Europe and Asia, have been cancelled by buyers as demand remains subdued amidst the virus outbreak. Furthermore, the US has cancelled several LNG export cargos that were scheduled for the summer. Prices at the US Henry Hub traded at a premium to European gas hubs for the first time ever in early May, further disincentivising US exporters.

If European spot gas prices remain at current lows, we could see further cancellations of LNG cargos. Should prices fall below those at the US Henry Hub again, exporters near the US, such as Trinidad and Tobago, may seek to benefit from higher US prices rather than make the journey to Europe.

Market Insight: Long-Term

Oil prices ended April at the $22/bbl mark, and the steady recovery has continued throughout May with the front-month product currently changing hands at just over $34/bbl. The recovery has come as more nations ease lockdown measures and demand begins to recover, particularly in far-Eastern economies. Figures also indicate that production cuts, agreed by OPEC+ over Easter, are being adhered to. Oil has lost some ground in recent days as US crude stocks posted a significant, and unexpected, weekly build.

Carbon prices have gained ground from rising oil and strengthened equity markets. As with oil, a steady recovery has been observed throughout May with carbon now sitting comfortably above the €21/tCO2e mark. This of course increases the cost of generation for fossil fuel fired power stations and ultimately this cost is reflected on energy markets.

Market Outlook

The outlook for the coming weeks is neutral. In the shorter-term, rising temperatures, expected seasonal drops in demand and a healthy renewable outlook paint a bearish prompt picture for June. Norwegian flows are also expected to remain steady throughout the month. Short term price spikes are possible, such as those seen this week, should the renewable outlook change or demand for cooling increase.

Further ahead, there are mixed signals for oil. Demand is expected to continue to recover, with the IEA already forecasting that 2020 demand may not be as deeply impacted as originally thought at the beginning of the virus outbreak. The market is still clearly vulnerable to bearish drivers, such as further US stock builds and rising tensions between the US and China. OPEC+ is due to meet in mid-June, it is thought Russia may be less keen to extend cuts so market participants are eagerly anticipating the outcome of talks.

UK gas and power markets are still sitting at extremely favourable levels and so clients are advised to consider renewals. With the markets currently showing contango characteristics, prices further out being more expensive than nearer-term prices, we would advise that clients consider either Fixed contracts of 24 months or less or adopt a longer-term Flexible strategy at this time.

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