During the past few months, there have been several fundamentally significant developments reported; the permanent closure of Rough (UK’s large gas storage facility), an extension to the maintenance period at Kollsnes Gas field in Norway, various announcements related to restrictions in OPEC oil exports and other political matters. Generally speaking, such news would normally be considered bullish. However, as we have seen for several months now, UK’s wholesale energy markets have generally taken it all in its stride, with prices remaining relatively stable month-to-month, albeit with some day-day and within-day volatility. July 2017 has been little different, with annual prices only changing slightly over the month – prompt month prices did increase, though this was primarily weather related; towards the end of July, second half July particularly, it was slightly colder and less sunny than seasonally normal.
Despite underlying prices moving up very slightly, longer term sentiment, if anything, showed some bearish tendencies, as the forward curves for rolling annual prices weakened slightly, i.e. the nearby years moving down relative to more forward years – a slight contango move.
Whereas gas prices did move up very slightly in response to all the recent (bullish) fundamental news, the gas forward price structure showed a slightly more contango structure.
With the resilience to the bullish fundamentals and a slight increase in contango, it is indicative that the market believes there is sufficient supply and so we could see markets move down slightly before summer ends. Thereafter, direction will be influenced by how the winter develops and whether the market can continue to effectively withstand any further supportive news.
As before, purchasing recommendations should be one of caution and buyers should continue to use any flexibility to spread buying decisions out rather than risk fixing long term all at one time. Setting some low purchase targets/orders might be appropriate in order to protect against any winter surprises.
(NB: As an aside, the unusual undulations in the structure of the forward curve for rolling annual prices indicate some price discrepancies in the forward gas market and potentially represents arbitrage-trading opportunities for active wholesale traders, subject to market liquidity and bid-offer levels.)
Movements in the electricity forward curve for rolling annual prices were relatively limited with the most interesting feature being a slight contango shift in the nearby years but a slightly backward shift further out. This slight increase in backwardation suggests a slight weakening in near term sentiment, though expectations are still for medium term price increases. This market structure potentially provides an opportunity for buyers to consider extending contracts with their existing provider with the aim to pick up some of this increased forward backwardation.
Oil market analysts continue to be in OPEC watching mode and, except for active oil traders, it may be better to avoid the distraction of the weekly US oil data movements, as they seem particularly volatile at the moment, with revisions being applied retrospectively. Furthermore, UK’s energy markets have avoided the volatility experienced in the oil market recently, and so for the time being the oil market should be viewed holistically for signs of general trends and other macro-economic signals only.
What’s the Outlook?
Over the coming months analysts start looking at longer term weather forecasts for any indications what the winter might hold. Currently, most long-range weather models are providing few strong signals only that it could go either way – watch this space for updates.
While recognising we did have some very good weather early summer, it now feels like autumn has come early based on end July, we already have blackberries ripening on the bramble hedges – maybe by producing lots of early big fruit, Mother Nature is giving us its long-range forecast of an early winter!
Dr Tony West was formerly Director of Trading and Marketing at Innogy (now Npower), Head of Trading at Scottish Power and amongst other senior wholesale trading roles recently advised Gazprom on their power business development strategy.
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