Tuesday 30 January 2024
2024 Outlook
Welcome to our latest 'Markets and Outlook' blog where we'll be looking ahead into 2024 and providing insight into what key aspects may shape the UK energy market throughout the year.
In our last blog, we explored 2023, a year where both fundamentals and sentiment led market prices at various points. What will be the key drivers in the early part of 2024 and beyond, and will the risk of continued geopolitical unrest impact the energy mix and elevate prices in the UK and Europe? Matthew Chapman, Origination Analyst looks to answer these questions and shares his insight into the energy market and the current outlook.
Forecasts & consumption changes:
As we move into 2024, weather forecasts are a key element in how the UK energy market is observed. Changes in the forecast have largely been driving the markets in the first couple of weeks of January despite geopolitical concerns in the Red Sea still feeling through into gas and power markets. With cold spells experienced for the first couple of weeks in January, initial consumption projections showed that consumption was predicted to be above seasonal normal for these periods. Yet as we've now passed through the first cold spell, we've observed actual consumption hitting slightly lower levels than first forecast at around seasonal normal.
Seasonal spikes:
With the next cold spell due to be much colder, consumption forecasts are again well above seasonal normal but as consumers are still facing high energy bills, their consumption choices may have changed, and we may not see consumption as high as initially anticipated. Moving further into the 46-day forecast we see a spike to nearly double SNT (seasonal normal temperatures) before they drop down to season norms. Compared to weather forecasts seen only a week ago, it shows warmer temperatures, as well as being contradictory to some long-term weather patterns which have supported cold weather in February and March. This coincides with a change in consumption forecasts that now expect lower consumption for both LDZ (local distribution zone), and gas used for power from the 20th of January.
Storage levels:
Gas storage levels have fallen over the past couple of weeks as consumption increased closer to seasonal normal levels, with storage levels in the UK remaining good. In North West European, gas storage levels are just under 80% and with various forecasts looking to end winter with storage around half full, there are still many factors that could affect how the UK and Europe enter the summer period.
Maintenance & planned outages of gas infrastructure:
Looking forward, the graph below shows Gassco's current planned outages. No large-scale maintenance is planned until late April and then again in September which are Norway's typical periods to undergo annual maintenance as demand is usually lower. Closer to home, gas fields in the UKCS (UK continental shelf) are not expecting any maintenance any time soon and with spreads between NBP (national balancing point) and other European hubs tightening, there is little incentive to export volumes. On the supply side, flows from Norway have been at good levels and with no major outages, UK imports via Langeled are averaging just over 70 mcm/d in 2024 so far.
Strong nuclear power output:
2023 saw a return to stronger nuclear power output from France after the historic lows of 2022, with France becoming a net importer of electricity, after a major source of European power was lost after stress corrosion issues were found at many of the nuclear reactors in the nation. Observing current forecasts, the French nuclear fleet is expected to increase capacity further throughout January 24, although market participants note that forecasts from EDF, who produce French nuclear energy can change. EDFs production forecast for 2023 was estimated correctly even though many reactors took longer to return for multiple reasons including strikes, delays, and issues with maintenance. This resulted in capacity scheduling initially being higher, with the first few weeks of 2024 online capacity continuing to be lower than forecasts. This problem has continued as current capacity is below many forecasts from a few weeks ago. Although we can note the problems mentioned above, current levels are above historical averages and looking into Summer 2024, nuclear power in France is expected to have at least 45 GW of capacity online throughout most the period. It's important to remember that there is still the possibility of unplanned outages, with high river temperatures possibly leading to shutdowns, and extensions to planned maintenance for various reasons.
LNG in the energy mix:
As a result of the significant drop in Russian supply to Europe in 2022, LNG became a larger part of the energy mix in Europe, and this has continued into 2024. Currently 31 cargoes are expected to arrive in the UK and NWE (Northwest European) by the end of the month. Current scheduled are positive with Asian demand for LNG being low, while gas stocks in the region are at good levels and use of other fuel sources has risen over the year. Moving further into 2024, LNG will likely continue to play a large role, so it's important to consider what the current picture is for Asian LNG demand. 2024 forecasts show that demand from countries such as Japan, South Korea and China is likely to increase although not to pre-crisis levels.
Spot demand & Asia:
In the short-term, spot demand is muted with improving temperature forecasts in Japan and China, but long term weather patterns are showing possibilities of colder periods in March with gas stock levels falling by nearly half. If these cold snaps persist, this could be a crucial test for Europe with potential of renewed volatility and increased demand for spot LNG cargoes. Currently Asian buyers are taking more volume in the form of long-term contracts rather than spot cargoes. With covid rules in China now relaxed, 2023 didn't see a return to strong levels of economic growth as debt outpaced the economy with banks lending to high end manufacturing rather than from reliance on property developers seen over the last few years. This is a similar story across South East Asia with various GDP forecasts being cut for 2024 although they are still higher than for 2023. There is also likely to be difficulties for domestic demand due to persistent high inflation and interest rates but there is some hope as exports have risen for the third consecutive month as demand for processing chips has increased and optimism of an economic recovery driven by semiconductor exports.
Continuing conflict:
With continued conflict in the Red Sea, market participants remain wary of further escalation as some LNG shippers are taking the alternative route around the Cape of Good Hope rather than via the Suez Canal. This adds additional shipping time and if larger than expected growth is seen from Asia and competition for cargoes increases, it may see LNG heading to Asia rather than Europe, possibly causing some volatility and elevated prices in Europe.
Final thoughts:
To conclude, there are various factors to consider as we move into 2024 on both the demand and supply side. Weather is likely to play a key role towards the end of winter and how UK and European gas storages enter the injection season. Currently supply from Norway is expected to be at good levels with only short periods of annual maintenance towards the end of April and September. French nuclear capacity is expected to increase and remain elevated in the summer, although market participants remain wary of delays to some returning capacity and over estimation in forecasts from what's happened in 2023. With LNG now playing a more important role in European gas supply, the Asian supply and demand picture should also be tracked to gain understanding of possible competition to Europe.
Please note: All information provided is a representation of current market conditions using various sources and forecasts may change.
