Year-ahead gas and power prices continued to push higher in the last week. The gains developed in increasingly thin trade as the energy markets wound down activity ahead of the Christmas break. The gains have pulled the annual gas and power prices above levels from the start of the month, but still below the highs of the year, seen at the start of November. News of extended maintenance at Rough over the winter, as well as strong crude oil prices contributed to the gains.
Oil prices have been supported by ongoing uncertainty over the state of supply in 2017. The new year will provide better information if OPEC and non-OPEC producers are enforcing their planned production cuts. This helped keep prices around the $55/barrel level, which is over $10/barrel above where they were at the end of November.
While the near-term supply-demand fundamentals are currently good, there remain concerns heading into next year. The gas system has been generally oversupplied, with storage withdrawals adding to the excess and offsetting a drop in imports from the Continent. However, Centrica have announced that maintenance on Rough long-range storage – the UK’s largest storage site – would be extended to the end of December, limiting some of its operations. Centrica has also raised doubts over the ability of Rough to deliver services next winter. It is consulting on dramatically reducing the capacity it offers to the market. If accepted, it would mean that the UK would go into another winter with reduced supply flexibility.
The power system has been similarly healthy. Demand has been sharply below National Grid expectations so far this week. With schools and businesses closing ahead of the Christmas break, peak demand has dropped 2-3GW and further reductions are forecast for next week. This has reduced the need for fossil-fuel generation, which has also been offset by stronger wind output this week.