The great oil price drop and your energy costs


BIUIn the 10 months since June last year, the price of Brent Crude Oil, the European benchmark for the commodity, lost in excess of half its value, falling from highs of $115/bbl to $46/bbl. The reason, put simply, is a mismatch between supply and demand to the tune of circa 2 million barrels per day, comments BIU in this sponsored post.

Oil prices over and above $100/bbl has encouraged investment in higher cost field from the majority of the oil majors, culminating in non-conventional drilling particularly in the United States.

Add this to slower growth in China and Europe, the rise of renewables and the increasingly interconnected global gas market and prices have collapsed whilst the unwillingness of OPEC to react on supply side has caused the longest bear run since the financial crisis.

So, will the crash push the price of power and gas lower? Yes, and it has already, and should continue to depress gas prices whilst oil prices remain low. Two of the UK’s major sources of gas supply, pipelined gas from Russia via Europe and liquefied natural gas, the majority of which stems from the Middle East, are indexed linked to the price of oil on a six- to nine-month lag.

European gas suppliers have begun to draw the maximum volumes their contracts allow which has therefore weighed on gas prices across Europe by forcing other sources to lower their prices competitively.

Power prices have also been driven lower, with gas fired power generation acting as the UK’s marginal power supply, gas prices tend to have a major influence on power prices. Unfortunately the market is never predictable and despite bearish pressure from low oil prices, the market tends to find support from anywhere it can when prices are low and with several geopolitical and macroeconomic uncertainties abound, low prices are far from certain.

Enough of the theory, the pertinent question remains does your energy procurement strategy and/or contract allow you to take advantage of changes in the market?

In today’s low price environment it is vital that large energy users can both hedge against any potential upward risk whilst being able to take advantage of lower ‘within period’ prices. Over the past 12 months, as prices have continued to fall well into each season it has paid dividends having a balanced and risk managed purchasing strategy.

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