David Cox, Pöyry Energy Consulting
Provides a detailed analysis of the major drivers to energy prices and the relationship between oil price and the prices for coal, gas and power. Consideration is given to price in forward markets, price risk, global and regional markets, and the potential impact of the credit crunch. Future prices are considered through four views of the future world (Slow-motion Shock; Supply Hell; Demand Crash; and Technology Heaven). It is suggested that oil price weakening will bring down Continental oil-indexed gas contracts, but not before next spring and that Continental gas prices should set the floor for UK gas prices. However, a number of factors could combine to result in much lower prices, such as: a warm winter; low coal prices reducing gas demand in power generation; and lower demand for global LNG resulting in cargoes being “dumped” into the UK. However, if the winter is colder than average and gas from Norway/Continent/LNG does not arrive, the price could rocket upwards. It is recognised that any decrease in liquidity will exasperate the volatility.
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