November bearishness continues into December

Wednesday 18th December 2019

The general downturn in energy seen in the second half of November has continued in December. Gas remains abundant, so electricity generation demand has been down. Another major factor in generation costs has been wind output, with a record 16GW produced at one point (44% of the UK mix) due to the latest Atlantic storm. Currency markets have also helped UK generation costs, with the rise in sterling that preceded then followed the election result meaning that gas imports got cheaper.

However, the fickle nature of energy pricing has been all too apparent over the last two days, and at the time of writing, markets are looking distinctly more bullish than during the first two weeks of December. Various factors are causing this reversal: wind generation has dropped at a time of cooler temperatures, so gas demand has increased for both generation and heating; oil is at a three month high, buoyed by OPEC+ cuts, a slowdown in US shale production and an indication that the US-China trade war may be close to resolution; sterling was hit hard yesterday as the new government’s desire to complete an EU trade deal by December 2020 made analysts assume a hard Brexit was more likely.

As we head into the holiday period, so demand will fall as industry shuts down. Temperature forecasts for Christmas week are generally above average and wind speeds are expected to increase. There is also a lot of LNG (liquefied natural gas) shipments ready to dock at UK ports, to further top up the well-stocked gas reserves. As such, the gains of the last two days may well stall.