BuyEnergyOnline Monthly Price Watch Report - August 2011 |
Energy prices were extremely volatile during August, ending the month higher. Gas prices rose 5.3% to 2.46p/kWh and electricity prices rose 2.5% to 6.15p/kWh. Oil prices fell 1.3% to $115/barrel, coal prices rose 2% to $127/tonne and carbon permits rose 6.5% to €12.87/tonne.
Forward Price Graph
Key Price Drivers and Risks
Prices dropped early in the month following global economic crisis over sovereign debt and renewed recession risks in US and Europe, before rebounding to close higher on hopes for further US monetary stimulus.
Focus on US Fed
Global financial and energy markets focused on Bernanke’s speech to the world’s central bankers
over the last week. Markets rose in anticipation of further indications of monetary easing. Following
the speech markets rose further based on announcing an extended Fed monetary policy meeting
over two days to be held on Sep 20th and 21st. Also Bernanke confirmed Feds commitment to using
monetary tools to tackle any further weakness in the US economy.
Sovereign indebtedness and fears of double-dip recession
Markets tumbled earlier in the month, but then recovered, based on fear over global recession
driven by sovereign indebtedness of western economies. US politicians resolved at the last minute a
Mexican stand-off over increasing the debt ceiling to pay interest on debt and the public sector
payroll. This was followed by S&P downgrading US Government credit rating. European sovereign
debt concerns spread to Italy and almost France. US and European bank stocks tumbled during the
sell-off but didn’t recover with the rest of the stock market. Economic growth in Germany, which
had been largely powering limited economic growth in the Europe, ground to a virtual halt in the
second quarter with 0.1% growth.
New energy infrastructures
Germany and UK energy suppliers are increasing their profit margins to source funds of £100s of
billions over the next decade to modernise electricity infrastructure with cleaner technologies which
are considerably more expensive than traditional fossil fuels. If funds are unable to be sourced the
suppliers will need to invest in gas fired generators which are cheaper and also cleaner than coal.
Middle East risks easing
A risk premium remains in oil prices due to the Middle East uncertainty and risks of escalation.
Middle East remains in turmoil with Syrian uprisings, Libyan rebel victory becoming chaotic and
introduction of new democratic processes progressing with uncertainty in Egypt, Tunisia and Yemen.
If Libyan situation stables new oil will start to flow and will grow over the subsequent 18 months.
Views
We believe energy prices will ease from current high levels as the global economy continues its struggle to avoid a double-dip recession and as new gas supplies come to market. We also think that upward price pressures to raise funds for modernising the electricity infrastructure will ease due to lack of funds resulting in an increase mix of cheaper gas-fired generation.
Recommendations
We recommend waiting as long as possible to lock away fixed price contracts or taking a flexible purchase contract to access spot prices. Flexible contracts are now available for medium sized energy buyers willing to take on some risk to reduce their costs. But beware the risk of Middle East turmoil.
Our auction based tendering process can secure the best fixed prices through liquidity, transparency and speed. Our flexible purchasing contract utilises our fixed price auction to determine a benchmark price, and allows buyers to buy cheaper energy by taking on and managing some risk and to reduce annual price volatility.
Note that these views and recommendations are offered for your consideration, but may be wrong as the market is highly uncertain. The energy markets hold additional risks which are unknown until they arise.
Derek Myers
Director
BuyEnergyOnline
0208 849 8977
