Missile strikes and price spikes risk higher bills for UK customers

The past week has seen a period of renewed volatility in the energy market, notably in the oil price, given developments in the Middle East. With the missile strike by US forces on Iranian General Qasem Soleimani in Baghdad on 3rd January being followed by a retaliatory strike by Iran against US military bases in Iraq, the tension between US and Iran has risen sharply.

As a result, the risk of direct military conflict between the two nations – or a wider escalation across the Middle East – have been reflected in the oil market given the potential disruption to supplies from the region. In the case of oil, the latest developments came in the wake of the latest cuts to global production from OPEC and Russia at the start of the month.

Although supplies of oil remain unaffected, prices surged more than 4% in early trading on 3rd January to reach more than $69 per barrel for the front-month ICE Brent Crude contract and – while they ended the session below these highs – prices still closed up by more than $2 per barrel. After a couple of mixed trading days at the start of this week, the latest developments pushed prices back above $71 in early Wednesday activity before retreating to $69 at the time of writing.

These movements and associated risks have resonated across the energy market, with GB gas and electricity prices displaying comparable levels of volatility – Summer ’20 NBP gas rose by 9% day-on-day on Friday 3rd, while the corresponding Baseload electricity contract saw a 5% day-on-day increase.

While the long-term impacts on GB energy markets will depend upon the enduring nature (or lack thereof) of the oil price increases, the potential for increased volatility in the oil market due to geopolitical issues – and resultant effects on the gas and electricity markets – is apparent.

For example, energy suppliers may be swifter to review their tariffs than may otherwise have been the case given the additional price risks they are experiencing. Likewise, the risk of further gains in the market may encourage traders to purchase energy sooner rather than later to cover any market exposure they may have, while a swift de-escalation of the US-Iran situation could lead to the erosion of any risk premium that may have been factored into prices.

These recent events demonstrate the extent of volatility and risk in the energy market that are faced by participants across the sector. To help you better understand these issues, Cornwall Insight’s Practical Energy Risk Management training course explains in detail the methods used to identify a range of risks faced by commercial entities (such as market, political, regulatory and systemic risks) and approaches to manage and mitigate them.

We look at ways to quantify risk, including an overview of value at risk and, as with other elements of the course, reinforcing learning with exercises. Case studies are used to show how different actors in the value chain typically approach risk management.

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