UK natural gas prices rose in December 2016 with the month ahead contract rising 10% amid surging Asian LNG prices, rising global crude oil prices, falling GB pound and cold weather. Northern Europe was gripped by cold weather, increasing gas-for-heating demand. Additionally, the UK’s largest storage site, Rough, had restrictions imposed on withdrawal capacity, creating Winter storage worries and incurring risk premiums on prices. LNG prices rose 33% amid rising crude oil prices driven by the OPEC-led crude oil production cut, cold weather across North-East Asia and tighter supplies caused by outages at various plants. U.S. Henry Hub natural gas prices increased amid cold weather across North America. U.S. nat gas storage fell 18 Bcm (13.9%), ending the month with 112 Bcm, further buoying U.S. nat gas prices. UK electricity prompt prices fell however, as worries over France’s nuclear supply through the winter dissipated. Colder weather over Europe offered some support to the prompt, as France and much of Northern Europe rely heavily on electric heating in winter time. Later-dated electricity contracts rose, following UK NBP natural gas, global coal and surging European carbon prices upwards. Brent crude oil prices rose 5.3% through the month after OPEC and partners came to an agreement following three months of debates to cut output and reduce a supply overhang of 1.5 – 2.0 mbpd that has depressed prices for two years. Additionally, U.S. crude oil inventories dropped by 9.1 mbbls (1.9%) through December. The U.S. oil rig count increased by 48 units to 525 units, offering some resistance. European thermal coal prices rose 5.9%, while Chinese coal prices surged 10.2% amid rising crude oil prices, increased Asian imports and tighter supplies due to a crackdown on illegal mining by the Chinese government. Carbon emission prices rocketed 46% as lawmakers in the European Parliament Environment Committee adopted a long-awaited draft proposal for a reform of the EU carbon market after 2020, including a higher rate at which permits should be removed from the market. Last month, we expected UK NBP natural gas and UK electricity baseload month-ahead prices to fall around 10%, however the unlikely agreement among oil producers led by OPEC caused a reversal. The electricity baseload month-ahead fell in line with our prediction, although less pronounced. Further dated energy contracts had been predicted to fall between 3 and 5%, but instead rose 7-9%. We expect energy prices initially to continue their upward trend, rising 2-8% as the GB pound weakens further, then may come under downwards pressure, ending the month flat / only slightly higher as non-compliant oil producers increase output and fill the void left by the OPEC-led production cut, temperatures get warmer and the out-of-favour GB pound finds bottom and is bought up by speculators.

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