Attacks will Hike Retail Gas, Power Bills: Analyst
The devastating effects of the drone attacks on Saudi oil installations are set to resonate across the energy markets, raising the prospect of higher energy bills for customers, said UK energy consultancy Cornwall Insight.
Early trading September 16 saw the price of oil increase from $60.22/b to $71.95/b for the front-month ICE Brent Crude contract, a four-month high and the highest day-on-day jump in years. However, the contract subsequently surrendered some of its gains to reach about $66/b. The market closed at $60.2/b on September 13. Price increases have also been seen across British gas and electricity contracts in early activity, the consultancy said.
Senior consultant Craig Lowrey said the oil price rise would lead to a corresponding rise in gas and electricity prices, which will be reflected in higher tariffs for customers going forward, while existing fixed-price fixed-duration tariffs may also be withdrawn.
“With the default price cap, based on a lag in wholesale prices, recently being lowered by [British energy regulator] Ofgem for the upcoming winter period, any suppliers that are not already hedged may not be able to entirely pass through the rising wholesale costs to all their customers.
“While trading and hedging strategies for suppliers and market participants need to be dynamic and reactive, there is no benchmark for an event of this magnitude. As such, this uncertainty may lead to higher and more volatile prices at least until more information becomes available," he said.
Saudi Aramco has not updated its website since announcing the attacks on the evening of September 14, although it said then that an update would follow within 48 hours, meaning late September 16. So far there has been some speculation that the repairs could take months rather than weeks and that Saudi Aramco has begun mobilising rigs to fill the gap. Also some customers are taking different blends of crude.
However, the attacks show that the market has undervalued the risks facing Saudi oil production, as the kingdom continues to fight a proxy war with Iran in Yemen. The attacks cut half Saudi Aramco's oil production, months before the government hopes to sell a small percentage of its 100% stake.
Energy watchdog International Energy Agency called for calm September 14, saying there were adequate commercial stocks for the time being and that it was in talks with consumer and producer nations about replacing the missing 5.7mn barrels/day of production. It too has not updated its statement.