April 2014 Energy Market Report: Drop in Wholesale Prices

April 2014: Wholesale gas prices continued to fall in April as a result of lower demand across Europe and larger than normal gas inventories built up over the last six months,according to the latest Wholesale Market Report from Naturgy.

While markets continue to factor a political risk premium into prices, the report shows that upward pressure on prices due to ongoing tensions between the Ukraine and Russia has eased with gas supplies from Russia into Europe unaffected to date by the evolving situation.

A crucial driver of lower prices has been suppressed demand due to warmer weather conditions since winter last year and the absence of any major unplanned outages in sources of supply to the network. This has lead to significantly higher than normal European gas inventories, which are currently up 27% compared to April 2013.

Day-ahead prices – the contract for gas delivery for tomorrow – finished trading on Friday (25th April) at *48.8p, down almost 26% since the beginning of the year and just over 23% lower than at the same point in 2013. This weakness has also fed into the lower pricing of gas for the May-2014 contract and other contracts due to expire over the next three months.

Vayu’s senior energy analyst Joanne Daly says: “The gas market is fundamentally bearish at present while factoring in a risk premium for uncertainty in Ukraine. We’re seeing the prices of gas contracts further out than one month being dragged down by the prospect of reduced demand over the summer and lower requirements to build up inventories. This trend looks set to continue over the coming weeks and is particularly good news for businesses looking to take advantage of lower wholesale prices.”

Commenting on the ongoing situation in Ukraine, Ms Daly says that tensions with Russia are expected to continue to encourage volatility in major energy markets including the UK, where Ireland directly sources the vast majority of its gas supplies. As Europe’s biggest gas supplier, Russia provides approximately a quarter of continental demand, a third of that coming via Ukraine.

“Any disruption in supply would have knock-on effects on prices in Ireland given the interconnected nature of Europe’s energy markets. However, Britain – which is Ireland’s major source of gas – is better placed to handle supply disruptions compared to countries in Central and Eastern Europe that rely more heavily on Russian supply.”

Electricity Generation Update

Although lower gas prices would usually see a drop in electricity prices, a combination of lower wind energy production in March and voltage issues in the Dublin area meant that more expensive energy sources were dispatched to meet demand. This resulted in a 6% increase in the average wholesale electricity price month-on-month in March. However, the average wholesale electricity price so far in April is 5.335 c/kWh – down 16% from the average during March and down 28% compared to this time last year.

While the exceptionally high wind output in February was not repeated again in March, overall the first quarter of 2014 saw wind energy continue to make a substantial contribution toward electricity generation in Ireland. Over 6,717 gigawatt hours (GWhrs) of wind energy were generated in the first quarter, representing over 24% of total electricity demand for the country during this period.