Mid-February upturn reverses as coronavirus fears increase

Wednesday 4th March 2020

Energy markets recovered up to mid-February as the global effect of the coronavirus was downplayed. The fears for the economy through January were easing. However, market weakness returned as the virus took hold elsewhere, particularly nearby in Italy. All markets fell, particularly the April ’20 Annual as a summer pandemic was anticipated to slow the global economy and thus cut demand. At the same time, the key Brent Crude oil index hit a 2.5 year low below $50, having been near to $70 as recently at early-January. We also saw the biggest weekly fall since on the main international stock markets since the 2008 financial crisis.  

However, in the last couple of days, we have seen some bullishness return, with sharp intra-day cost increases on power and gas Annuals. This has been driven mainly by the main global Central Banks committing to shoring up their economies in the face of the coronavirus impact. So for example we saw the US Federal Reserve cut interest rates on Tuesday, and there is more talk of the Bank of England reducing rates in the UK. We also have apparent commitment from Russia to join the OPEC countries in cutting oil production again and thus potentially to boost the price from current circa $50 levels. Another economic factor increasing UK energy costs is the recent weakness of sterling: the tough stance on Brexit talks and the perception that sterling is not a ‘safe haven’ in the face of coronavirus disruption means that the pound has dropped 5c versus the euro in the last week, increasing energy import costs.

Short-term markets have seen some recovery in recent days as the storms that brought record wind power generation have eased. The cooler temperatures have also increased heating demand for gas.