July 2014 Energy Market Report: 38% Drop in Gas Prices Year-on-Year

Irish wholesale gas prices hit four-year lows in July

Monday, 28th July 2014: Wholesale gas prices hit fresh four-year lows in July before seeing a limited rebound due to heightened geopolitical tensions between Europe and Russia, according to the latest Wholesale Market Report by Irish energy supplier Naturgy. While the situation in Ukraine continues to pose a risk, its impact on gas prices in Europe is offset by strong supplies, low summer demand and a build-up of larger than normal gas inventories.

Suppressed demand due to warmer weather conditions has been a major driver of lower gas prices year to date. Combined with increased shipments of LNG (liquefied natural gas) from the Middle East, this has resulted in strong stock-piling in the UK market, which is the major source of gas supply into Ireland.  Gas storage now stands at 95% capacity – compared to just 67% this time last year – which represents 45 days of supply if withdrawing at maximum rates.

Gas prices for next-day delivery finished trading on Friday (25th July) at *40.50p, down 39% since the beginning of the year and 38% lower than at the same point in 2013. This weakness has also fed into lower pricing of gas for the August-2014 contract and other gas contracts due to expire over the next three months. However, market fundamentals suggest that prices have reached a floor with demand unlikely to weaken much further. Increased gas demand in the power generation sector has prohibited any such further drops.

Joanne Daly, Senior Energy Analyst at Naturgy states: “While there is little prospect of any significant rise in wholesale prices at present given the strong levels of gas supply, this could change depending on the crisis in Ukraine. Any increased risk to the supply of Russian gas destined for Western Europe would feed into upward pressure on both near and long-term prices.”

Ms Daly notes that Russia meets almost a third of European gas demand, and it pipes almost half of these supplies via Ukraine. Markets are therefore continuing to factor a political risk premium into prices. Previous disputes over gas pricing and volumes have led to three disruptions over the past decade, and some traders fear the tense situation this year may result in a repeated cut-off.

“Another source of potential price volatility is a scheduled outage for Norwegian deliveries to Britain for the second half of August due to North Sea maintenance,” says Ms Daly. “However, while North Sea production changes in the past have had a strong market impact, any price increases this time around are likely to be limited.”

Electricity update

The average wholesale price of electricity in the Irish market so far in July is 4.74c/kWh – down 7% from the average in June and down almost a quarter (23%) 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 over 4,300 gigawatt hours (GWhs) of wind energy generated so far – representing 14% of total electricity demand for the country.

“We are seeing wind energy playing an ever more important role in meeting Ireland’s electricity demand and this looks set to grow as businesses and energy users look toward renewable sources to reduce their environmental impact,” says Ms Daly. “The good news is that we have an abundant supply of wind generation potential in Ireland and there is enormous potential for further development, which will be vital if Ireland is to meet its target of 40% renewable generation by 2020.”