Wednesday 10 January 2024

2023 End of Year Review

Welcome to our 2023 End of Year Review blog where we'll be taking a look back at key events which have impacted the UK energy market throughout the year and provide insight into market drivers and what's affected price volatility.

In the 2022 End of Year Review, we touched on the potential outlook for 2023, which focused on themes such as European and UK storage levels, if sustained muted consumer demand would continue to lower prices and unseasonable weather patterns. Have these factors come to fruition and impacted the energy market throughout 2023, read on to find out.

The energy market in 2023:

After a turbulent year in 2022, 2023 saw an overall downward trend in prices, although a return to levels before the Russian invasion of Ukraine has not been seen. 2023 has been a year of fundamentals v sentiment where we have seen continued volatility with bullish news having large effects on price movements. Q1 saw a period where bearish fundamentals such as mild temperatures and low demand eased prices but as we moved into summer, delays in annual maintenance in Norway, the Israel/Hamas conflict and the Baltic connector destruction all caused increases in prices and a continued period of volatility. As winter has approached, prices have retraced with bearish signals largely taking the front seat as gas storages across both the UK and Europe have filled to technical capacity and El Nino (unusually warm ocean temperatures) has started to take effect.

Price Snapshot:

Demand destruction:

In Q1-23 the market observed prices falling throughout the period for a couple of reasons. Temperatures were largely above seasonal normal with only a few periods where below normal temperatures were observed for a prolonged period. Due to mild temperatures, LDZ demand in the UK saw significant reductions to an average of 15% - 20% with aspects such as heating demand as well as changes in consumption behaviours impacting this. Low demand led to injectors in the UK and Europe filling up storages with excess supply in period and at the end of March MRS levels in the UK stood at 56%, a significant rise compared to previous years with a similar story for gas storages across NWE (Northwest European).

Summer months:

In comparison to Q1-23, in summer we observed a different story. Volatility in prices was rife driven by extensions to Norwegian outages at Nyhanma and strikes at Australian LNG facilities. From early May to late June outages averaged around 100 mcm/d with four fifths of the volume cut by the outage at the Nyhanma gas processing facility. Initially most volume from the first period of summer maintenance in Norway was anticipated to return by mid-May. However, we experienced a delay of roughly four weeks which caused a large jump in prices. Prices across both the UK and Europe really didn't start to fall again until the second week of June when there was greater confidence in the market that no further delays would be seen. Once volumes returned, prices started to fall back down with the rest of the energy landscape being bearish and returning volumes being utilised for gas storage injections. However, the backend of summer saw another period of heavy maintenance in Norway with even greater volumes offline from major fields such as Troll and Oseberg. Delays were seen again which led to withdrawals from gas storages and further market volatility.

Strike action:

In this second period of maintenance sentiment further took the forefront in the marker as workers at three LNG liquefaction terminals threatened strike action with the terminals accounting for 10% of global export supply. Although the facilities mainly sell to the Asian market, it resulted in volatility in the UK and Europe as there was a potential that Asian buyers would have to look at LNG from other suppliers possibly competing against European buyers. Woodside Energy quickly came to a deal with unions to avert strike action at their facility but Chevron and the workers at the Gorgon and Wheatstone facilities went through a prolonged discussion with workers at the terminals striking. On the 18th of October Chevron and Unions came to an agreement averting any further strikes. Lastly in the later part of Q3 with very warm temperatures some outage alerts for the French nuclear fleet were observed as rivers used in the cooling process had the potential to cut capacity with river temperatures close to reaching regulatory limits.

El Nino weather patterns:

As we moved into the winter period, we saw a shift in how the market priced with fundamentals like Q1 taking the front seat against sentiment. Despite the Middle East Conflict, damage to the Baltic connector (later found to be a lose anchor from a Chinese vessel) and consistent delays in the return of French nuclear reactors, both gas and power prices fell throughout most of Q2-23.

Final thoughts:

In conclusion, 2023 was a year of sentiment v fundamentals. With an overall bearing fundamental picture in Q1-23 and Q4-23 the market observed falling prices with little other news uplifting prices. However, the summer period saw a large amount of volatility as delays to maintenance in Norway and Australian LNG strike action resulted in sentiment of the market dropping for periods of time and risk premiums being added to prices. Although Q4 did have some bullish news from potential supply disruptions from the Middle East, the risk was seen as lower in the market and large amounts of volatility was only seen for short periods of time.

Looking ahead into 2024, in our next blog, we'll be taking an in depth look at the outlook and provide insight on what key aspects may shape the UK energy market throughout the year. Keep an eye out for this on our blog pages in the coming weeks!