Reino Unido : April 16, 2009
Recently the Financial Times published two articles on energy related matters that were thought provoking and relevant to our evolving view on the medium term trends in energy pricing.
The first article was based on a discussion with the Head of the International Energy Agency (IEA) and focused on the impact that lower energy prices are having on the oil producing nations. According to the IEA, the average price of oil during 2008 was $100 per bbl and since the beginning of 2009 it has been trading in the range of $40-50 per bbl. If oil were to stay in this range for the rest of the year, the IEA has calculated that there would be a net transfer of wealth from producer to consumer countries in the order of $1000 bn. The benefits for consuming countries are manifested in lower input prices across industry and transport that should provide some additional stimulus to the North American and European economies in addition to the range of fiscal and monetary policies already underway.
Aside from the very real problems that some oil producing nations will face with substantially reduced income and associated political destabilization, a low oil price provides no incentive to invest in new production facilities. When demand recovers, the result is likely to be capacity constraints – and a quick upward movement in the oil price. The oil producers are targeting an oil price of $70-80 per bbl as an acceptable level to attract investment while avoiding the demand destruction which has been brought about (at least partly) by the high prices of mid 2008. OPEC seems determined to cut production to achieve this goal and have already announced cuts amounting to 4.2mmbbl/day from world supply (this represents around 15 percent). However, demand has fallen faster than supply and further cuts are likely to be considered at the next OPEC meeting.
The real question is what impact will this have on UK energy prices? The answer may be not a great deal if one is to consider the second article from the FT which looks at the number of LNG (liquefied natural gas) projects which are scheduled to come on stream over the next two years. These projects will expand global LNG capacity by around 30 percent just at the time when demand has collapsed.
Though most of these projects have been backed by long-term contracts, these contracts would allow some reduction in demand, which strongly suggests that there will be cargoes of LNG seeking a home. Many of these are likely to go to North America, but with the recent expansion of the Isle of Grain LNG terminal and the South Hook terminal in Wales due for completion this year, undoubtedly some shipments will arrive in the UK.
While shipping from Qatar is likely to be around 18p/therm (0.6p/kWh) the marginal price of gas is likely to be low so even after terminal costs this should keep a lid on UK gas prices – and as 40 percent of UK electricity generation is gas based this should act to restrict price increases in the coming months.