Tough market conditions are rife in the energy sector – but who is to blame?

As climate change concerns become more prominent and demand for a greener energy sector grows, we look at the problems facing the UK and wider energy markets

The global energy market finds itself at an interesting crossroads. Whilst there’s plenty of resources to go around, shifting environmental attitudes and rising costs amid global political grievances have meant tough market conditions, not to mention a few huge questions marks hanging over the industry.

Trouble at SSE

The news of UK ‘Big Six’ provider SSE’s sinking profits is indicative of the current domestic platform. The Scottish provider recently reported its annual pre-tax profits at £725 million, a 38% drop on the previous year.

SSE saw its customer accounts plummet, with their electricity customer base falling from 3.82m to 3.46m and their gas accounts drop from 2.53m to 2.32m – a collective loss of over half a million customers in the 2017-18 period.

Whilst SSE will point to the collapse of its planned merger with NPower as a factor in recent struggles, the company has also wrestled with some of the wider impacts in the global industry; namely rising costs and a need for heavy investment in green energy projects.

A new, energy-conscious world

The recent Extinction Rebellion protests surpassed the traditional impact of climate change demonstrations by doing more than annoying those not involved, and actually seemed to have a notable level of public support behind them. Considering the recent reports of climate scientists claiming world powers have just 12 years to save the planet from an irreversible demise, it appears that the public is finally, truly coming around to the need for greener solutions.

This of course, reflects onto the energy industry, and the emphasis for sustainable, lower carbon energy solutions is growing more powerful by the day. The direct financial impact to energy businesses comes via people making more conscious consumption decisions, reducing their usage and lowering their monthly bills.

Indirectly, the clamouring for greener options from the energy market means the big names are having to direct substantial funds towards green technology and research. With SSE pledging to continue with millions of investments into low carbon solutions, even in the face of terrible yearly results, the impact of the new energy-conscious world is plain to see.

Investment questions amid political & trade conflicts

Coming into 2019, one of the most immediate concerns for the global energy market was the ongoing US sanctions on Iran and Venezuela.

As one of the world’s major oil producers, Iran was exporting 2.1m barrels per day (bpd) at the end of 2017. By the end of last year, that figure had reduced to 1.1m bpd and sat at less than half a million bpd across the month of May. Venezuela’s production has dropped steadily by 50,000 bpd a month, with total production now likely under 1m bpd – a far cry from its 3m bpd peak 20 years ago.

These sanctions, coupled with an intentionally curbed output from the member states of the Saudi-led Organization of the Petroleum Exporting Countries (OPEC), are an interesting talking point for investors amid falling global oil prices.

Recent US trade disputes with Mexico and China have deepened concerns surrounding the reduction in global demand for crude oil. With US crude settling at a four-month low of $53.25 and Brent crude futures dropping 1.2% on Monday to $61.28 a barrel, the focus in the market has shifted towards avoidance of a surplus in order to create demand.

Saudi Arabia, along with the rest of the OPEC states and Russia, have committed to lowering output with the aim of stabilising the market in the second half of the year. Assurances from Saudi Arabia regarding the OPEC-led pact limited further losses on Monday’s numbers. Indeed, Saudi Arabia dropped production in May to 9.65m bpd – a figure significantly lower than their 10.3m target under the new pact.

Such activity presents an interesting opportunity for oil and Oanda traders, who may see value in investment in the current market prices. Should the OPEC plans to stabilise the market come good, the crude market could soon see an upturn from its slump.  Of course, as the US continues to turn the screw on Iranian and Venezuelan output, investors will have to keep an eye on the political atmosphere as well.

From domestic tariffs to global investment, it appears the shift in attitude and demand for fossil energy is having a significant impact in the market. Whilst the energy industry will hope for a calmer second half of 2019, there are undoubtedly plenty of challenges to come from a changing market.