August 2014 Energy Market Report: Wholesale Gas Prices Down 33%

Supply uncertainty due to tensions in Ukraine putting upward pressure on prices

Monday, 25th August 2014: Wholesale gas prices are down 33% compared to this time last year, according to the latest Wholesale Market Report by Irish energy supplier Naturgy. While prices increased slightly at the start of the month, they have fallen back in recent days but have not managed to fully offset the risk premium built in due to supply uncertainty from Russia.

The slump in prices is being driven by significantly lower-than-average demand for gas since the beginning of the year due to warmer weather conditions and increased shipments of LNG (liquefied natural gas) from major suppliers such as Qatar. This has resulted in substantially increased gas inventories in the UK market, which is the major source of gas supply into Ireland. Total UK storage is now at 91% capacity while storage levels across Europe are currently 83% full.

The report shows a positive outlook for European supplies for the winter period, with the only risk coming from concern that Russian gas supply through Ukraine could turn down at some point. While this is impacting gas contracts, prices for next-day delivery finished trading on Friday (22nd August) at 41.7p, down 37% since the beginning of the year and 34% lower than at the same point last summer.

While reduced demand and healthy storage levels are acting as a cushion against geopolitical risks, the market continues to factor in a significant risk premium for gas contracts due to expire over the next three months. Any escalation of unrest in the Ukraine would result in higher prices, particularly for gas contracts further out than one month.

Joanne Daly, Senior Energy Analyst at Naturgy says:  “We saw a small increase in gas prices at the start of August due to a number of unplanned gas infrastructure outages.  Increased demand for gas from generators of electricity has also been a factor. That said, the market remains fundamentally bearish in near term given the positive supply outlook and substantial storage levels built up since January.”

Commenting on the situation in Ukraine, Ms Daly notes that any disruption in supply would have knock-on effects on prices in Ireland given the interconnected nature of energy markets in Europe. As Europe’s biggest gas supplier, Russia provides approximately a quarter of continental demand, a third of that coming via Ukraine.

Electricity update

The average wholesale price of electricity in the Irish market so far in August is 4.39c/kWh – down almost 8% from the average in July and down 29% compared to this time last year. This is mainly due to the ongoing low price of gas, which is the main fuel used to generate electricity in Ireland.

Year to date, wind energy continues to make a substantial contribution toward Irish electricity generation with 18% of Ireland’s total energy mix generated from wind so far in August 2014, up 7% month on month. So far this year, wind energy has generated 19% of total electricity used.