Energy Market Update - Friday 17th February 2023
In the news this week
According to the International Energy Agency's Chief Executive, the conflict between Russia and Ukraine has 'turbocharged' the green energy transition. Global renewables output jumped 25% last year, which is what was needed on an annual basis to limit global warming to 1.5°C. On top of this, electric vehicle sales have risen from 3% in 2019 to 15% in 2022, energy efficiency had increased twice as fast as previous years and nuclear power was seeing a comeback around the world. Climate change is now no longer the only driver for the clean energy transition, with energy security now becoming a primary driver. If renewable generation continues to grow at levels seen in 2022, it could mean that targets set in the Paris Agreement could be met on time and lead to downward pressure in UK energy markets with more cheaper renewables making up the power stack.
Europe's increased demand for LNG is likely to spur heightened competition with Asia for LNG over the next 2 years and may dominate trade for the super-chilled commodity in the longer term. LNG demand in 2022 had climbed 60% compared to 2021 as countries looked to diversify away from Russian supplies. An upturn in Chinese demand this year after being suppressed last year could cause this demand and competition to rise further. Now countries are looking at signing longer-term LNG deals instead of relying on spot markets to source the commodity at cheaper costs, secure reliable supply and to avoid any exposure to price spikes. This is meaning that competition may expand further than the next couple of years and UK gas prices elevated as a result, as LNG typically comes at a higher cost than pipeline gas.
U.S. Freeport LNG facility exports their first cargo since June-22 fire. Freeport LNG exported their first LNG cargo this week since a fire shut down the facility in Jun-22. To load the tanker Freeport has used supplies that were already in its storage tanks when the fire forced them to close in June. According to sources, production restart is close, with the U.S. Federal Energy Regulatory Commission giving their permission to load ships. Though they have not yet restarted the liquification process as they are still waiting for further approval. There is also still a level of uncertainty remaining in the market about the timeline for the return of feed gas demand at the facility. Freeport LNG accounted for roughly 20% of entire U.S. LNG exports at the time of going offline, so any further signs of restarting is likely to provide downward pressure to UK energy markets, on greater global supply prospects.
Current Market Drivers
A higher rate of storage injections is expected next week as a result of reduced demand and a continuation of strong imports. This is providing downward pressure to near curve UK gas contracts.
Rising wind generation and temperatures into the weekend are offering a downward direction to prompt UK energy contracts, on reduced fossil fuel demand.
20 LNG cargoes confirmed for Feb-23, coupled with strong Norwegian flows is providing downward pressure to near curve UK gas contracts on greater supply prospects.