Bord Gáis Energy Index December 2012


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The Index fell 2% as euro zone buyers of oil benefited from a combination of a weaker US dollar and marginally lower Brent crude oil prices. Lower wholesale Irish electricity prices in December also contributed to a fall in the index. As a result, the Bord Gáis Energy Index now stands at 149, an increase of 4% on December 2011.

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Bord Gáis Energy Index December 2012

  1. 1. Bord Gáis Energy IndexUNDERSTANDINGENERGYDecember 2012
  2. 2. Falling Oil Prices Push the Bord Gáis Energy Index down 2%Bord Gáis Energy Index (Dec 31st 2009 = 100) Bord Gáis Energy Index 12 Month Rolling Average 180 Overall summary: In December the Bord Gáis Energy Index fell 2% month on month as euro zone buyers of 140 oil benefited from a combination of a weakerPoints US Dollar and marginally lower Brent crude oil prices. Lower wholesale Irish electricity prices in 100 December also contributed to the month on month fall in the index. 60 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 1 Mth  -2% 3 Mth  -1% 12 Mth  4%In 2012, Brent crude recorded its highest ever annual average price at US$111.68 a barrel, as sanctions against Iran and conflict inthe MENA region resulted in the loss of 1.7 million barrels per day of crude production. However, as we move into 2013, investorsare growing a little less concerned about future oil supplies as the markets start to consider the impact of the significant increasein US oil production due to the use of hydraulic fracturing. Growing US oil production has been described as a potential ‘gamechanger’ that could reduce the world’s reliance on oil from the MENA region. Concerns about the global economy also weighedon Brent crude prices towards the end of the year as the so called ‘fiscal cliff’ loomed and euro zone growth forecasts for the yearahead were pared back significantly by the ECB and German Central Bank. An additional bearish tone was struck by OPEC as theyexpect the weakness in the global economy to drag oil prices lower in 2013 and they warned that the ‘fragility of the euro zoneremains a major concern’.Oil Index Oil 180 In euro terms, the front month Brent crude price fell in December by 2% as the market grew increasingly comfortable with global oil supplies and the US Dollar weakened versus 140 the euro.Points During the month, the Energy Information Administration (EIA) released a report which emphasised the growing strength of the US 100 as a major energy producer. In 2012, the US reached oil production levels not seen in 15 years, mainly due to the increased use of 60 hydraulic fracturing. This extra oil supply has Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 the potential to ease the current pressure *Index adjusted for currency movements. Data Source: ICE on Brent crude prices which is being caused 1 Mth  -2% 3 Mth  -4% 12 Mth  2% in part by growing global oil demand and limited spare capacity available from OPEC producers. Additional factors that are easing the pressures on global oil supply include: thepotential restart of oil exports from South Sudan; the extension of US waivers on Iran sanctions; forecast record oil production inIraq and weak oil demand in 2013 due to the many economic uncertainties. Other significant factors that weighed on prices duringthe month included the debt reduction negotiations in the US which is making the economic outlook for 2013 even cloudier andforecasts from the ECB and German Central Bank that slashed euro zone and German growth forecasts for 2013. As a result ofthese bearish tones, investors have reportedly cut their bets on oil rising in price by the most since May.Despite the month on month fall in the price of Brent crude, prices did receive some support as the Fed boosted economicsentiment by adding US$45 billion of monthly Treasury purchases to its existing programme and there is further evidence that theChinese economy is improving.
  3. 3. Natural Gas Index Natural gas During the month, the average UK Day-ahead gas 250 price rose by 1% in December despite falling demand and mild weather over the Christmas period. UK wholesale gas prices were supported by cold 200 weather in the first half of the month in particular as prices rose to attract sufficient pipeline gasPoints from the Continent and withdrawals from storage 150 and LNG terminals. UK gas demand received an additional boost early in the month as gas fired power generators started to produce more power as 100 electricity demand also responded to below average temperatures. As the UK and Europe lose more Qatari gas in the 50 form of LNG to Asian markets, the UK has become Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 *Index adjusted for currency movements. increasingly reliant on imports from the Continent to Data Source: Spectron Group meet demand this winter. In recent months, the UK 1 Mth  1% 3 Mth  7% 12 Mth  21% has been importing record volumes of gas which has been putting upward pressure on prices.However, with Russia’s gas exports to Europe reaching record highs in December, the availability of gas in the UK has not been an issue so far thiswinter. Other sources of supply include the UK’s own domestic resources, piped gas from Norway, storage and LNG supplies at terminals.Coal Index Coal In December, European coal prices decreased by 260 1% due to a weaker US Dollar. However, in US Dollar terms, coal prices were marginally higher as traders became concerned about coal supply disruptions 205 from Colombia in the months ahead. These potential disruptions arose on news that shipments from Colombia’s second largest coal exporter DrummondPoints 150 could be delayed by up to 15 days due to possible production problems and on the banning of the transportation of coal by night. With the rainy season 95 expected to start in Colombia in January, flooding also has the potential to disrupt vital supplies. As talks between the country’s largest coal miner and unions are ongoing, fears of a strike are adding to 40 trader concerns. With US cargoes all but drying up, Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 *Index adjusted for currency movements. reliable Colombian coal supplies have become even Data Source: ICE more important. 1 Mth  -1% 3 Mth  -2% 12 Mth  -20%On a positive note, milder weather in Russia has improved the likelihood of supplies of coal as freezing rail wagons, strong domestic demand and icein the Baltic ports had been hindering supplies in November and earlier in December. In addition, there is speculation that European supplies will beboosted in January by the unusual arrival of up to 6 cargoes carrying 900,000 mt from South Africa.Other factors that put downward pressure on European coal prices in December were an improved weather outlook for Europe in the short-term,weaker global coal prices (this has been lead by China where high stockpiles and falling domestic prices due to muted domestic demand areweighing on prices) and some poor European economic forecasts from the ECB and German Central Bank.Electricity Index Electricity 180 Despite rising wholesale gas prices in the UK and electricity demand in Ireland in early December, Irish wholesale electricity prices fell month on month. The wholesale price of a unit of electricity is made up of three components: commodity (which is wholesale 140 cost of buying gas or coal to produce a unit ofPoints power), carbon (which is the abatement cost for emitting carbon due to the burning of a fossil fuel) and spark (this is the theoretical profit earned by a 100 thermal power plant after paying for the commodity and carbon costs associated with the production of a unit of power). In December, despite rising wholesale gas prices, carbon and spark fell significantly which 60 ultimately applied downward pressure on Irish Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Data Source: SEMO wholesale electricity prices. Sparks were put under pressure as fewer thermal plants were called upon 1 Mth  -5% 3 Mth  3% 12 Mth  7% to produce power on days when the wind blew consistently and as electricity demand fell during the Christmas period.
  4. 4. FX Rates FX rates In December, the euro gained versus the US1.60 Dollar as US lawmakers engaged in a series of negotiations to address the budget situation.1.40 During the month, the markets feared that a failure to avert the so-called ‘fiscal cliff’ had the potential to nudge the US economy back into1.20 recession and this looming prospect weakened the US Dollar against most major currencies. In1.00 addition to these concerns, an announcement by the Federal Reserve Open Market Committee on December 12th to supplement their US$400.80 billion a month of mortgage-bond purchases with US$45 billion in monthly Treasury purchases, will0.60 substantially increase the volume of US dollars in Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 the financial system. This is seen by investors as another reason in the short-term for a weaker US1 Mth  2% 3 Mth  3% 12 Mth  2% EURUSD Dollar. The Dollar’s value erosion versus the euro occurred despite the release of negatively revised1 Mth  0% 3 Mth  2% 12 Mth  -3% EURGBP forecasts from the ECB and German CentralBank on the outlook for their respective economies in 2013. Despite the currency moves that occurred in favour of the euro in December,currency forecasters are predicting that the current budgetary impasse in the US will be overcome and that a sustainable US deficit willhelp bolster confidence in the Dollar and enhance its status as the world’s reserve currency. With the ECB expected to ease its monetarypolicy further in response to weak economic growth and inflation, some forecasters are predicting that the euro will weaken by a further10% versus the US Dollar by the end of 2013. The euro remained steady versus the British Pound in December as the economic outlook forthe euro zone and UK economies are equally weak.Market OutlookOil prices will continue to be dominated by developments in both demand and supply. With oil demand being largely a function of GrossDomestic Product growth, developments in the global macro-economy will play an important role in determining the price of a barrel ofoil. With the US, China and Europe accounting for over 55% of global GDP, and nearly half the world’s oil demand, what happens in thesethree economies in 2013 will be of vital importance. Record oil prices in 2012 were heavily influenced by fears of global supply disruptionsand the loss of Iranian oil due to EU and US sanctions. In 2013 we could see the subsiding of these fears, and potentially prices, if US oilproduction results in the expansion of OPEC’s spare capacity. However, the ongoing impasse with Iran and civil war in Syria remains acause of concern and until these are resolved, oil prices may continue to carry the US$20 ‘fear premium’.Over the next two months in particular, wholesale gas prices will be influenced by the weather and supplies. Precariously, European LNGimports have been down on average 30% in 2012 compared with the same period in 2011. Because of lost Qatari LNG supplies, the UK hasbeen forced to import more gas from the continent which has put upward pressure on wholesale prompt prices. However, because of themild weather in recent weeks, the wholesale gas market has not been put under any significant pressure. Looking further ahead, overthe next year, with Asian LNG demand expected to remain strong, the global LNG market will tighten as demand outstrips LNG supplies.Failure by the UK to attract these seaborne LNG cargoes could influence wholesale gas prices in 2013.Re-weighting of Bord Gáis Energy index Oil 64.93%Following the SEAI’s 2009 review of energy consumption in Ireland, releasedin Q4 2010, there was a 9.3% drop in overall energy consumption. The mostnotable drop of 1.39% was in oil consumption in the form of gasoline and diesel. GasThis reflects the economic downturn experienced at the time. The share of natural 13.52%gas and electricity increased by 0.63% and 0.57% respectively. An increase in theuse of renewables and peat, at the expense of coal in electricity generation wasalso observed. As a result the Bord Gáis Energy Index has been reweighted to Electricity Coalreflect the latest consumption data. This has had a minimal effect on the overall 3.16%shape of the Index, but may indicate future trends. 18.40%For more information please contact:Fleishman-Hillard — Aidan McLaughlin — 085 749 0484Bord Gáis Energy — Christine Heffernan — 087 050 5555The contents of this report are provided solely as an information guide. The report is presented to you “as is” and may or may not be correct, current,accurate or complete. While every effort is made in preparing material for publication no responsibility is accepted by or on behalf of Bord Gáis Eireann,the SEMO, ICE Futures Europe, the Sustainable Energy Authority of Ireland or Spectron Group Limited (together, the “Parties”) for any errors, omissionsor misleading statements within this report. No representation or warranty, express or implied, is made or liability accepted by any of the Parties or any oftheir respective directors, employees or agents in relation to the accuracy or completeness of the information contained in this report. Each of the Partiesand their respective directors, employees or agents does not and will not accept any liability in relation to the information contained in this report. BordGáis Eireann reserves the right at any time to revise, amend, alter or delete the information provided in this report.