UK natural gas prices rose in January 2017 with the UK NBP front month contract (Mar-17) rising by 13.2% amid cold temperatures, while UK electricity baseload month ahead prices fell by 2.5% pressured by falling European carbon prices. Natural gas prices were supported by cold temperatures throughout the UK and Northern Europe, boosting energy-for-heating demand from the domestic sector. Wind turbine output was also below the seasonal normal, adding additional natural gas and coal demand from the power sector. A further weakening of the GB pound relative to the euro lent further support as Continental traders were incentivised to take advantage of the weaker currency and subsequent falling premium of Continental over UK energy. A slight improvement of the LNG imports to the UK over previous months acted as resistance. Further resistance came from lower Asian LNG prices as oversupplied Japanese utilities sought to offload cargoes and as production restarts in Angolan and Australian plants boosted supply back into a subdued market, which was reeling under outages and high seasonal demand. The front month price of Brent crude oil rose to $55.70/mbbl, up 0.4% amid a weakening of the U.S. dollar and as output from Russia and OPEC fell as previously pledged, although the cuts are yet to reach agreed volumes with levels of compliance at 82%. Crude oil prices met strong resistance from high Iraqi exports and signs of rising U.S. production. U.S. total crude oil stocks rose by 15.8 (3.3%) to 495 mbbls in January while U.S. rig count rose by 41 (7.8%) to 566 rigs. European thermal coal prices for the front month lifted by 9.3%, ending the month at $85.50/t, due to lower-than-average temperatures and low wind turbine output across Northern Europe, which boosted demand. China's steel and coal sectors will face increasing pressure this year to cut capacity, as the government ramps up efforts to tackle polluting heavy industries and remove excess capacity. Carbon emission prices plunged by 18.4% as speculators sold their long positions ahead of the restart of the EUAs auctioning following the low liquidity holiday period, which brought prices to the highest level since April 2016. Last month, we expected UK energy prices to rise early in the month and then correct down to slightly above starting levels. While we were correct that energy prices would lift initially, and then push back down, a late-month cold spell and an unexpected extension to an outage at the Rough natural gas storage facility pushed energy prices up strongly during the last few days of January 2017. We now expect energy prices to push up further, initially by 3-5%, buoyed up by rising crude oil prices, cold weather, reduced natural gas flows from Russia and weak GB pound, but then come under pressure as the month moves towards its close, aided by falling oil prices as money managers liquidate their 3-year-high net long positions and strengthening of the GB pound relative to the euro.

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