Falling oil prices will cut utilities’ costs by late Q1, say analysts

European utilities could see their input costs fall by the end of the first quarter as Brent crude prices continue to tumble to five and a half year lows, according to analysts.

Citigroup said the heavy losses seen in global oil markets since last summer will impact more than a third of gas in Europe which is still bought through oil-indexed supply contracts which usually have a 2-6 month time lag.

“[T]he sharp drop in oil over the last 3-4 months will be filtering down as a lower input cost to utilities in late Q1 and they will then be able to pass it through to customers from Q2 onwards,” an investor note from Citigroup’s utilities team said.

Already France is set to become the first European country to announce that its regulated gas tariff has been cut by 1 per cent to reflect the historically low oil price, according to local news reports.

The analysts said that while lower oil and gas prices often have a negative impact on energy companies Citi said the ability to pass lower costs on to consumers – or at least cap price rises – may help ease political pressure facing retail supply companies.

“[T]here is a silver lining in that, as long as these [lower costs] are passed on to customers, possibly lower overall bills could relieve some regulatory pressure on utilities and avoid any harsher direct intervention from governments,” Citi said.

“It is important to remember, though, that the 2013/14 winter was extremely mild, with gas demand down 10-20 per cent in most European countries, meaning that overall customer bills might actually still end up flat or even up [year-on-year] just on weather normalisation of demand even if unit prices end up being lower,” the note added.