Member Article

Higher oil prices continue to drive energy costs for business

The impact of higher oil prices, which look like stabilising close to a two-year high, is pushing wholesale energy prices up by 5 to 10%, according to Inprova Energy.

Brent crude oil prices hit a two-year high of $64 per barrel on 30 November. This was on the back of a decision in Vienna by OPEC and other major producers, including Russia, to extend an agreement to curb crude oil output by nearly 2% through to the end of 2018. Prices have since reduced slightly, but market analysts don’t expect any significant fall back.

“Higher oil prices have a knock-on effect on UK business energy market prices”, said Richard King, Trading Manager for Inprova Energy. “Both gas and electricity contracts for delivery in the next few months have posted significant gains of around 5 to 10%. This has reversed recent decreases in energy prices earlier this summer, and has been exacerbated by continuing volatility in the currency markets with the value of Sterling reacting to each positive or negative outcome of the Brexit negotiations between the UK and the EU.”

Oil price increases this year have been largely driven by cutbacks in supply from the oil exporting cartel OPEC and its non-OPEC partners as part of a strategy to rebalance global oversupply. Having initially agreed to end the cutbacks in March 2018, the latest Vienna agreement has extended the supply constraint for the whole of next year. The aim is to reduce the global supply glut that has weighed on the market since 2014 and to stabilise oil prices within the $60 - $65 range.

In a further boost to recovering oil prices, global demand for oil shows no signs of slowing. Strong economic growth in Asia is leading to revised upwards forecasts, despite US producers producing record levels of crude from increased fracking activity. Tighter supply conditions also give greater risk premium to geopolitical factors that could cause price spikes within the oil markets, such as continuing political tensions between Saudi Arabia and Iran, civil unrest in Libya and the economic crisis enveloping Venezuela.

Richard King added: “In addition to the pressures oil is placing on wholesale energy prices, market volatility is being exacerbated by colder and uncertain winter weather conditions, as well as the continued threat of energy supply reliability problems from continental Europe. This makes further price swings are inevitable, but that’s nothing new. Energy buyers have experienced a 45% swing in the wholesale power market over the past 12 months.

“Although near-time energy prices are demonstrating signs of firming, the outlook for wholesale power prices beyond 2018 is currently attractive. And while the market outlook for the next quarter sounds like it’s bad news for energy buyers, we must bear in mind that current commodity prices are well below the levels reached in 2014.

“Extreme energy market volatility underlines the importance of timing when purchasing energy and the need to have a robust risk management and flexible trading strategy to underpin procurement activity. This will ensure that trading takes place within agreed price parameters to guard against hitting the top of the market and incurring losses.”

This was posted in Bdaily's Members' News section by Inprova Energy .