Risk premium rise for UK and European Energy Markets

Dukefield Energy continue to monitor the markets and here is a detailed overview of what is going on and the outlook for the immediate future.

Recent months have seen the risk premium rise for UK and European energy markets, with markets primarily concerned about Russian gas flows to Europe being reduced or halted. This culminated towards the end of May, with several European countries, Netherlands and Poland, seeing gas supplies cut off. However, since the end of May 2022, upside risk associated with gas flows concerns have eased as Russian gas exports have continued to Europe, though slightly lower than in much of Q1 2022. Some of the downside has also stemmed from strong imports of Liquefied Natural Gas (LNG) to the region, though this has left the UK and Continental energy markets more exposed to global LNG market dynamics.

On Wednesday, Freeport LNG, one of the largest U.S. export plants producing LNG, announced they will be closing for at least 3 weeks following an explosion at one of their facilities. Freeport LNG provides around 20% of U.S. LNG processing, meaning its closure will take away a major supplier to markets which are already strained by European buyers refusing Russian LNG and a resurgence of demand in China. This impact is likely to spread through Europe and Asia’s markets, with the shortages of supplies increasing competition between buyers and driving global LNG prices higher. This is providing upside risk to near curve gas contracts, however easing concerns around Russian pipeline supplies may limit the upside.

Customers with any renewals up in the remainder of 2022 should start to look at their contracts now, as leaving this too late will limit the options available to you.

If anyone has any concerns or just wants some advice, please don’t hesitate to contact us.