Energy Market Update – Russia & Ukraine

Jonathan Reeves eyebright energyThere’s concern about the escalating issues between Russia and Ukraine, especially as Vladimir Putin has now taken military action. This uncertainty is leading business decision makers to receive conflicting advice on what the best course of action is for their company.

Some of the key points to remember from this week are:

  • The market yesterday was driven by pure fear and speculation. There has been no tangible change to the current gas situation. The major concerns at present relate to next winter and the potential for a supply shortage, which is pushing up longer term prices.
  • The market closed yesterday around 65% higher than it opened, but it’s already down around 20-25% today, but it’s very volatile.
  • The hardest hit prices are winter 2022/2023 by some margin, but it’s now extending out and pushing into 2024 prices.
  • All standard market drivers would normally have the price trending down.
  • Many people have commented that we could just switch to electricity. It’s important to remember almost half of the UK electricity is produced using gas. 25% is produced with wind, solar and hydro power. Nuclear is a little over 10%. We’ve seen coal prices and carbon certificates rising as a result.

There have been rumours about what should or could happen, but this is again speculative. Addressing some of these with the intention of alleviating fears:

  • The general consensus at present is that gas supplies from Russia will not be interrupted as it would be disastrous for both sides. Russia needs the money and Europe needs the gas. So, although we are not getting gas via the Yamal pipeline at present there is every possibility we will.
  • Nord Stream 2 has had its problems from the start and at present it won’t be proceeding further forward anytime soon. This will be problematic to long term gas prices as Nord Stream 2 was considered as part of the answer to reducing the current pricing situation.
  • Some of the main gas pipelines in Europe flow through the Ukraine above ground. The fighting isn’t anywhere near them at present and it’s thought this will be avoided by Russian forces, but if they were to be damaged it would cause major market disruption.

What’s the current concern?

The main issue for business owners and procurement specialists is the gas reserves. The storage supply of gas hasn’t been replenished in the same fashion as it normally would and this has been consistent for some time. Therefore, gas prices will remain high for some time.

You may consider the UK level of reserves to be relatively secure (based on the graph), however we have very low storage capacity and this can be depleted very quickly in comparison to other nations. Furthermore, with other European countries in the same, or worse, situation, there’s a supply/ demand problem.

Our gas supply levels are falling at a time we would expecting them to start replenishing for next winter.

Source: Total Gas & Power

We’ve also heard this week from other businesses asking for a second opinion about their energy prices. Some consultants have told them they’ll “be cut off” if they fail to renew their contract immediately. This is not true.

At this unpredictable time the least worried business owners should expect is honesty. If your contract is about to end and you haven’t renewed, you won’t be breaching any contract or without supply. You will move to more expensive out of contract rates and this could be financially detrimental, but if you want advice on the best course of action for your business then please get in touch.

 

What should you do?

The market will settle and it will find a new “normal” very quickly. We have been through major events many times before and the market always settles. It will be difficult for some businesses, but we’re committed to listening and proposing the best solution for your circumstances.

We have expanded our range of basket products to offer more opportunities for clients to purchase their energy in a low, medium and high risk strategy. We have also expanded our team of industry experts so we can address your concerns quickly.

Never before has an experienced business energy consultant been more valuable and we’re determined to support our clients with transparent, comprehensive and holistic advice, so you can make empowered decisions.

Finally, I think we can all agree our thoughts and prayers go out to the Ukrainian people at this difficult time.

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