The UK energy markets rose strongly through October 2016, with day-ahead UK NBP natural gas prices reaching levels not seen since April 2015. Relatively few shipments of liquefied natural gas (LNG) entering the UK as Qatari vessels sought better deals from South Korea buoyed up UK NG prices.

Cold temperatures throughout the month in both the UK and continental Europe supported gains as domestic heating demand increased.

UK electricity prices were subjected to further upward pressure from European electricity price rises amid French nuclear power supply concerns after the French nuclear safety regulator requested safety checks on several reactors. European energy prices were subsequently pushed to multi-year highs. European union allowances (EUA) also rose with European electricity prices, with additional support coming from increased coal demand. Global coal prices surged, with the European benchmark API2 rising $13.43/t (19%) as government-enforced Chinese mining caps spurred imports to the world’s biggest energy consumer.

The premium of Australian coal for next month delivery over the equivalent European physical coal price doubled to $26/t, allowing exporters to benefit from arbitrage opportunities.

Crude oil offered feeble resistance to the price rise in October as concerns over OPEC’s proposed oil production cut mounted. Furthermore, the U.S. oil rig count increased to 441, up 13 rigs and U.S. crude inventories rose by 13.47 mbbls. Nigerian and Libyan output partially recovered through the month after disruptions and Iraq boosted exports, further flooding the market already awash with crude oil.

We expect UK energy prices to reverse direction in November and see a meaningful correction to the downside (10-15%) amid lower crude oil prices and improved supply position. Weakness of the GB pound will continue to resist price falls unless we see positive developments concerning the UK’s economic outlook.