What are the key drivers in the energy market for 2022?

What's happening in the energy market right now?

Recently, the cost of electricity has followed gas up to extraordinary levels, but the increase for forward prices has not risen to the same extent, as market participants believe some of the factors which drove the price increase in 2021 were particular to last year (low wind generation, low levels of gas in storage, rebounding economies from COVID closures, Russian reduced gas flows to Europe), and in the future these will not be repeated in such a dramatic fashion, or can be offset through alternative sources.

Fundamental short-term drivers would ordinarily, at this time of the Winter season (Oct to Mar), be more influential in determining the price direction for the next few months, as opposed to longer term drivers. The short-term drivers are currently all pointing towards lower prices, having been supportive for the last few months, however with volatility at the highest levels ever seen and prices moving in excess of 10% some days (in either direction) there will inevitably be bumps along the road.

Push & Pull

Temperatures in the UK and Europe are above seasonal norms and forecasts of windy weather mean that renewable generation will be higher than average, having been below average in Q4/21. Gas in storage is no longer at multi-year lows, meaning demand for gas injection during the Summer will be reduced and there will be less pressure moving into next Winter (Oct-22 to Mar-23).

To counter these there is reduced baseload generation from French nuclear plants for 2022-23 and given the large interconnectivity between UK and Europe and the subsequent correlation in market prices, then any changes on the Continent are reflected in our domestic market.

Also, European gas in storage currently remains well below the 5-year average for this time of year.

Forward Markets

Prices of forward contracts such as those for delivery Oct-22 to Sept-23 move very much in tandem with short term price influences as shown to the right, so any dramatic drop in near-term prices is likely to be quickly reflected along the curve.

Drivers in more detail

1. Gas / LNG

The GB electricity market is highly correlated, at seasonal level, to the traded gas price, which in turn moves in sync with the European gas price and increasingly with global indices of LNG.

Gas has become so important because of the rush to decarbonise the energy sector and remove coal from the generation mix in particular.

The forward LNG graph below shows the general direction of global markets and the discount to the spike in Dec 21.

2. Short Term drivers

2022 is currently looking much healthier year-on-year from a fundamental perspective and as a result, the extent of price increases in forward contracts is somewhat reduced. Temperatures have been mild throughout and late into the winter season and are currently forecast to reside above, or in line with, seasonal norms.

LNG sendout to both the UK and EU is up year-on-year, with the UK scheduled volume increasing 14% and the EU volume up 73% in comparison with Feb-21. Gas storage levels for the UK have since been replenished, currently sitting at multi-year highs, whilst withdrawals have slowed on the continent, potentially allowing for injections ahead of the summer period. Short-term drivers are predominately negative in their impact on market levels.

LNG Tanker	From	Expected Arrival	Volume	Unit
LNGSHIPS ATHENA	Peru	16/03/2022	162,975	m3 LNG
GRACE DAHLIA	United States	27/02/2022	163,508	m3 LNG
ALSAHLA	Qatar	25/02/2022	201,320	m3 LNG
AL KHATTIYA	Qatar	22/02/2022	197,238	m3 LNG
MARAN GAS POSIDONIA	United States	22/02/2022	151,876	m3 LNG
ISABELLA	United States	21/02/2022	162,833	m3 LNG
BRITISH ACHIEVER	United States	19/02/2022	167,600	m3 LNG
ARCTIC DISCOVERER	Spain	18/02/2022	136,125	m3 LNG
MALANJE	Angola	16/02/2022	153,059	m3 LNG

3. Unforecastable Influences

Whilst the current weather patterns indicate lower than normal electricity demand, and there is a steady programme of LNG deliveries into the UK and Europe there remains risks to the rosy outlook.

Forward prices could be dramatically impacted if they have not incorporated price premia for potential short term and longer term external shocks.

The biggest unknown at the point of compilation is whether Russia will invade Ukraine. If they do would they sabotage the existing pipeline that goes through the Ukrainian transit route? Would Germany refuse to permit the opening of the Nord Stream 2 gas pipeline directly from Russia to Germany- and if so for how long?

Could Europe get enough LNG to compensate both in the short term and longer term? Would the EU and UK permit higher carbon emissions from fossil fuel plants to ensure security of supply?

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