Energy bills are driven by both the price of energy on the wholesale market and Third-Party Costs (TPCs). TPCs include non-energy costs set by the government, network (the National Grid), policy and system costs, and electricity transmission/distribution costs.
One of the biggest single costs on a bill is the price of energy. The wholesale cost of energy makes up approximately 40% of an electricity bill and 70% of a gas bill, with the remaining being TPCs, which have been continuously rising in recent years and can be volatile.
This pricing report focuses on the energy element of a bill to help you keep track and understand the wholesale energy market and the factors affecting the price of your contracts.
Energy prices have increased further again, with wholesale electricity prices increasing by 81% when compared to this time last year and wholesale gas prices over 153% more expensive.
Tight supplies continue to be the main driver of the increased rates.
There is still a reduction of gas supplies coming into the UK as strong Asian demand for the fuel continues, resulting in growing concerns about gas availability and an inevitable surge in prices.
The result is much more energy being taken out of storage, which is usually used for the winter months. By using them now puts pressure on supplies which increases the demand and therefore prices.
A report by Morgan Stanley also indicated that it expected oil supplies to tighten further by the end of the year as global demand grows. OPEC+ members are planning to increase their oil production quotas from August.
However, investors are predicting a global demand recovery which could reduce any oil surplus.
The main factors which could push prices lower are the concerning spread of the new delta variant and any potential lockdowns this could bring which would postpone the increased demand for energy.
Singapore has already reverted to strict social-distancing measures to contain a recent outbreak that started at a karaoke lounge.
Iran is set to start their next round of nuclear talks early in August, which could see Iranian oil legitimately return to the market at some point, increasing global supplies.
We are seeing some initial energy renewals come in over 40% more expensive than the previous rates and this is expected to continue.
Over 90% of the time we can beat these initial prices so take advantage of a free energy review and see what we can do to help.
Bullish Factors (upward pressure on markets):
- Storage demand increasing, as a reduction of gas supplies into the UK continue.
- Unplanned power generation outages.
- Reduced wind generation.
- Report forecasting oil supplies to tighten as global demand increases by the end of the year.
- Strong US dollar, making crude more expensive for other countries.
Bearish Factors (downward pressure on markets):
- OPEC+ members set to increase oil production in August.
- Oil demand uncertainty as daily new Covid cases in the US continuing to rise.
- Delta variant of COVID-19 spreading, threatening potential restrictions, with Singapore returning to a partial lockdown.
- Unknown Iranian oil supply, with the next round of nuclear talks starting early August.
Gas and Electricity
Supplies continue to tighten, with expectations for increased storage demand and a very limited number of gas deliveries coming into the UK to restock the supplies used in storage continuing.
This continues to be a key driver of the market, due to the stores lowering making demand stronger which has strengthened trading within the carbon markets and gas markets.
Power contracts also increased in price this week, supported by unplanned power generation outages on Friday and reduced wind generation. Wholesale electricity prices have increased by 81% compared to this time last year and wholesale gas prices are currently over 153% more expensive.
Brent crude traded higher on Friday following expectations of increased demand by the end of the year as forecasted by Morgan Stanley.
Wholesale oil prices remain firm despite the concerns around the new delta variant and the reintroduction of Iranian oil, as investors remain buoyed by hopes of a recovery in oil demand.
Brent is currently trading 69% higher than this time last year and 43% higher than at the start of 2021, with WTI 72% higher in price than last year and 48% higher than in January.
Current price standings:
Brent Crude = $73.95/bbl
WTI Crude = $71.66/bbl
Iran and US Working Towards Ending Trade Sanctions
The bullish factor of tight market supplies countered the bearish factor of the current spread of the Delta variant in many countries.
At the start of this week, the market is weighing the currently tight supply against fears of slowing demand growth if the Delta variant impacts mobility and travel.
With daily new Covid cases continuing to rise, including in the US, oil demand uncertainty was the main driver of market sentiment. A strong US dollar also weighing on the oil market as a rising US dollar makes holding crude more expensive for holders of any other currencies.
Goldman Sachs has been calling for $80 a barrel oil this summer, expecting strong demand recovery, despite expectations that Iranian oil could return legitimately to the market at some point and despite the two-week-long stalemate within OPEC+ about how the group would proceed with oil supply management.
Now that OPEC members have reached an agreement to increase predictions quotas in August, ING strategists Warren Patterson and Wenyu Yao said early on Monday, “Volatility in the market has eased, which leaves the market with a couple of key known uncertainties for now”. ING says the key uncertainties are the Delta variant spread and potential restrictions over it, plus the unknown with Iranian oil supply as the next round in the nuclear talks are due to start in early August.
Even if there is an oil surplus should Iranian oil return, investors are still hopeful of a strong global demand recovery towards the end of the year. For the UK especially this causes some concerns as planned and unplanned maintenance on gas pipelines into Europe and a continued reduction in supplies coming into the UK means stored energy is having to be used instead to keep up with demand. If this continues there could be shortages come the colder months, pushing the demand and prices even higher.
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