Newsletter 1st March 2016

Unravelling Oil Prices

The price of oil steadily dropped throughout 2015 and early 2016 with a knock on effect for wholesale gas and electricity prices. This fall was largely unforeseen by the whole industry, indeed in 2014, the Scottish Independence party were building much of their campaign around profiting from North Sea oil at a price of $110/barrel. Today oil sells at around $34/barrel.

The International Energy Agency (IEA) is the World’s leading expert on energy markets and its analyses of crude oil prices and supplies make headlines and affect prices across the globe. After the last two years, however, the IEA seem baffled and admit that the old assumptions about how oil markets work no longer apply. In their latest report they say; “some certainties that have guided our past outlooks are now not so certain at all” and “attempting to understand how the oil market will work during the next five years is today a task of enormous complexity”.

Whilst there was little anticipation of this change and it seems little confidence in future predictions, it is now widely agreed as to what the drivers have been behind the supply / demand imbalance and fall in prices.

  1. The US is now producing more oil than ever, through shale and offshore developments and has become largely independent.
  2. OPEC has not restricted its members output in an attempt to put pressure on US prices – the US oil industry is however remaining very resilient.
  3. Global growth is relatively slow largely to do with the economic torpor in China and Europe

These changes have had a significant knock on affect to gas and electricity prices. Wholesale prices for both gas and electricity are now at their lowest point since 2007. The story of the retail price – the price that you, the consumer, pays is however slightly different.

Gas is a relatively green fuel and requires little conversion before it is sold on to the customer, as such much of the wholesale price decreases are passed through to the retail price.

Electricity, on the other hand, needs to be generated from burning gas or coal etc. and even with the increasing use of renewable, is a much less clean fuel than gas. Because of this electricity has been subject to a wide range of levies designed to provide income for providing greener generation for the future and developing the generation and transmission network. These additional charges have masked the benefits of falling wholesale costs and the retail cost for electricity is now only marginally lower than in 2014.

We are monitoring the situation and will work with all of our clients to optimise the benefits available to you from the current depressed market.

Current Market Position

Mild temperatures, healthy supplies and lower oil costs kept prices stable over February despite cooler weather.

February temperatures in the UK were consistently warmer than normal for the time of year but across Europe they were significantly cooler than usual, causing a slight uplift in prices mid month.

An announcement from SSE that three of the four units at the Fiddler’s Ferry coal plant would be closed from April also kept electricity prices from falling.

Further afield, data released showed Iran achieved record production during Febru-ary and with sanctions lifted Iran are now allowed to sell on the International mar-ket, which is adding to oversupply and falling oil prices.

Last month saw an announcement that there was to be a meeting between OPEC and non-OPEC producers. This meeting is now not going to take place for the time being, so oil prices are expected to re-main low.