WHAT IMPACTED ENERGY PRICES IN MAY 2023?

TOP 3 FACTORS AFFECTING ENERGY PRICES

• Fundamental outlook continued to be healthy despite heavy maintenance
• Strong injections into storage helping to weigh on Seasonal contracts
• Brent Crude also fell sharply throughout the month as economic concerns grew
  

Day Ahead and Prompt contracts continued to trend lower throughout May, with the continued strong fundamental outlook continuing to weigh on prices. Arrivals of LNG into UK & Europe continued to be healthy, with global supply remaining strong coupled with weak Asian demand. This is despite the spot Asian LNG price falling to a 2 year low towards the end of May. Weak Asian demand for spot LNG, in addition to allowing a strong LNG supply into Europe has also allowed for strong injections into storage into the region.

Seasonal contracts have taken direction from the prompt contracts throughout the month and have also trended lower, ending the month

significantly lower than where they were at the start of the month. Similar to the prompt contracts, the strong fundamental supply outlook has helped to weigh on these contracts. LNG arrivals are forecasted to continue to be healthy throughout the summer period, which in turn is expected to allow European gas stocks to be fully replenished.

The weakened demand in both Europe & Asia has also removed some of the risk sentiment around supply shortages for the Winter contract and has helped to weigh on prices. Current weather outlook has also helped to weigh on seasonal contracts, as temperatures over the upcoming 6 weeks are expected to remain above seasonal norms, reducing gas demand, whilst also increasing renewable generation. At the same time, there is not currently expected to be a significant uptick in demand for cooling, allowing injections into storage to continue.

Although longer term risk still remains, this is largely around weather, especially if we see the arrival of an El Niño weather front, which is currently has a 75% chance of occurring this Winter into next Summer according to the Australian Bureau of Meteorology. If this does occur, we can expect to see a colder, drier Winter for the UK & Europe as well as a drier, hotter Summer in 2024. Additionally, we may see an increase in demand in the Southern hemisphere as they experience hot, dry weather throughout summer.

Market Outlook

We may start to see some upside throughout June, particularly for prompt contracts as the maintenance schedule across Europe increases and also includes the complete shutdown of LNG terminals. Should this occur, we may start to see this filter into the seasonal contracts, particularly if there are any unexpected issues which may cause an extension to the planned maintenance, especially in either France or Norway.

The majority of the maintenance that is scheduled is expected to be completed before the end of June. Should these facilities come back online, as expected and temperatures outturn as they are currently forecast, which is expected to continue to weigh on demand across Europe then it is entirely feasible that we will see further downside towards the end of the month, heading into Q3. However, due to the changing nature of the supply mix and Europe's current reliance on LNG, a close eye will need to be kept on Asian demand, particularly as we approach the end of rainy season when typically, temperatures start to increase.

If we do start to see an increase in Asian demand, this may provide support to spot LNG prices, which in turn would be expected to provide support to both gas & power contracts.