Wholesale price snapshot

Over the last two months we have seen oil prices fall to their lowest levels in four years. These reductions have had a knock on effect on UK gas and power prices.

Long-term gas contracts fell in October. Summer 15 gas dropped 4.2% to average 53.1p/th and the contract ended trading 16% below levels seen at the start of 2014. Long-term power prices also dropped in October, with the summer 15 power contract losing 2.3% to average £48.5/MWh.

But a fire at Didcot B power station, nuclear outages and rising demand pushed up short-term prices. Day-ahead gas rose 4.1% over October to average 50.5p/th. The contract rose to a five-month high of 52.7p/th on 29 October. Day-ahead power prices continued to rise in October, gaining 4.3% over the month to average £45.0/MWh. The contract rose to a 12-month high of £52.0MWh on 28 October.

Oil prices saw further declines in November as OPEC nations continued to keep supply volumes high. The resulting oversupply in the global market pulled oil prices to a new four-year low of $78.1/bl on 20 November. This, combined with similar falls for European coal prices, helped pull long-term power and gas contracts lower last month.

Long-term gas prices saw a second consecutive month of falls in November as the continued slump in oil and a strong UK gas supply picture impacted prices. Summer 15 gas was down 2.1% to average 51.8p/th. The summer 15 power contract was down 1.3% month-on-month to £47.9/MWh. Meanwhile, the annual April 15 contract dropped below £50/MWh for the first time.

But UK spot prices remained volatile as increasing demand and unplanned outages led to a tight short-term system. Day-ahead gas rose 7.5% to average 54.2p/th and hit an eight-month high of 58.2p/th on 25 November, following outages at Norwegian pipelines. Day-ahead power followed higher, and exhibited a £10/MWh range over the month as temperatures and wind output were volatile. The contract rose 7.1% to average £48.1/MWh. Prices are now 60% above their summer lows.

Having fallen below $80/bl, several analysts are now forecasting that $70/bl Brent crude oil is a distinct possibility in the near future. A sustained low oil price could put further downward pressure on gas and power prices.  Gas supplies also look to be in a strong position for the coming winter. The Rough gas storage facility, the UK’s largest, is now at 100% capacity. Supplies look set to remain high for the rest of 2014, with the Met Office predicting warmer and windier weather through to the New Year. This is likely to suppress gas demand for heating and also raise wind output, reducing the need for gas in electricity generation and feeding through to power prices.