Drax emerges as clear winner as UK power prices soar

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Gas prices in Britain have hit levels last seen when the Beast from the East blew through in 2018, but the situation is not going to ease soon suggests Deutsche Bank (NYSE:DB).


Spot prices have risen by more than three-fold over the past five months, noted the broker, thanks to a combination of low stocks in Western Europe due to Covid, demand recovering in Asia and outages and maintenance shut-downs in key suppliers such as Russia.


A fire yesterday also knocked out an electricity cable that connects the UK and France adding to the pressure.


Prices are at levels not reached for at least seven years, Deutsche Bank (NYSE:DB) said today.


“Inventories, strong global demand and unexpected outages have all played a part, but our key takeaway is that as we head towards peak Northern hemisphere winter demand with still relatively low gas inventory levels in both Europe and the US, there is no clear reason why prices should return to more ‘normal’ levels anytime soon.”


The broker has raised our 2021-23 average forecast UK NBP (UK benchmark) prices by 30% and Henry Hub (US benchmark) by 20%.


Gas pricing in the UK and how to cope as a business: an explainer


In spite of the surge in gas prices, Deutsche Bank (NYSE:DB) was cautious with changes to its price targets for the big suppliers.


BP has its price target raised to 320p from 313p, though Shell was trimmed to 1,871p from 1,937p.


The biggest mover of the day though was the electricity generator Drax Group (LSE:DRX) PLC, which was given a helping hand by an upgrade from analysts at Barclays as well as being identified as a beneficiary from the soaring energy prices.


Shares in the power plant operator surged 9% to 478.2p as analysts pointed out its generates power from biomass and hydro, not gas, so it should get the benefit of rising electricity prices.


Barclays, meanwhile, in a well-timed note reckons Drax is worth 960p, a huge 75% upgrade on its previous target and based on what it says are notable improvements in the investment story but little change in the share price.

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