OPEC false dawn and other factors drive power Annuals

Thursday 5th July 2018

Gas and power markets remain closely aligned to oil, which has proved to be volatile in recent weeks. There was bearish sentiment leading up to the OPEC meeting on 22nd June where an increase in production was to be agreed to stabilise oil prices. Whilst this meeting brought more (mainly Saudi) oil to the market, it clearly was not as good as it may have been – it was effectively raising production by 1 million barrels per day (bpd), whilst President Trump’s latest tweets on the matter suggest 2m bpd is required. At the same time, the President is also telling allies not to but Iranian oil, which is counterintuitive if the desire is to reduce the price. Production issues in Canada, and capacity problems in Texas are also hitting North American oil prices.

Another market driver we are currently seeing (particularly on the short term market) is the prolonged heatwave. The relatively calm weather has seen wind power drop (although unsurprisingly there has been good renewables news with record solar output in the UK and Germany). Lower wind means more gas generation is required as increased temperatures mean increased cooling demand. This is happening whilst gas storage injection is starting to peak for the pre-winter replenishment. It is quite pronounced how 2018 wholesale has been so affected by similar high pressure meteorological systems with extreme cold and extreme heat bringing increased costs.