During March 2015 the increased volatility seen in February continued, however, despite this, forward annual prices were generally down by the end of the month compared to end February. Warmer mid-March weather was followed by lower than seasonal-normal temperatures at the end of March, which together with some concerns about storage availability in Rough helped create slightly more backwardated forward curves, implying a more bullish sentiment growing in the market.
Gas price volatility continued during March 2015; the first half of the month showing weaker prices, despite the impression of a tightening day-day supply from Norwegian gas fields that was easily offset by good storage deliverability and LNG supply, whereas the second half of the month saw prices move up due to a relatively cold start to Spring, extending storage offtake and thereby increasing the demand for summer gas in order to fill storage for winter 2015; this was compounded by concerns over storage capacity availability. Market ‘bulls’ were also pointing to the perceived low oil price for support though in reality oil did not rally and remained weak; hope of any real recovery is not expected by most commentators until 3Q15. In the meantime, the news coming from Centrica and SSE concerning the status of storage availability is providing mixed signals, impacting the supply/demand balance for this summer and winter 2015. Nevertheless, by the end of the month forward UK gas prices were trading approximately 1-2% lower than the end of February 2015, though it is true to say nervousness still abounds and the forward curve for the rolling-annual price looks to be in transition; indicating the potential of a more bullish market sentiment for the coming months.
While the gas market continued to be a significant driver behind the power market movement, the weather, or more relevantly the wind, was also an important driver. At the beginning of the month, milder temperatures and good wind speeds enabled high wind power generation, helping lower prices. However, towards the end of the month temperature cooled, increasing heating demand and the reliance on gas for power generation – the wind was also a bit too strong and gusty as April approached – though weak coal and oil prices dampened the impact. The rolling-annual forward curve for power also looks to be in transition with a flattening contango and slight backwardation at the front.
Brent prices also showed some volatility throughout March 2015, trading in a $10/bbl range, though finally ended the month at similar levels or slightly down on February 2015. Of further note was the reducing, albeit still steep, contango in the crude oil market as large volumes, particularly WTI, were put in storage and forward sales made to ‘lock in’ the higher forward prices. Several oil commentators now expect the impact of lower oil prices to begin to reveal itself on US crude oil production, which is expected to start falling from May. Consequently, the 2016 global oil balance is now likely to be only slightly oversupplied with tightening fundamentals starting to take hold in the third quarter of this year.
What’s the Outlook?
The next few weeks should clarify the extent of sentiment change in the markets, which has been showing signs of turning. With the rolling-annual forward curve for gas moving to backwardation being a good indicator of a more bullish sentiment, it at least implies gas price levels are likely to hold for the time being and the risk of a sustained up move is more likely. The power market seems less clear and so more prudence and patience may be required. If the temperatures stay cold – home central heating doesn’t look like being turned off just yet – and gas supply and storage issues continue to make headlines in the market, this will probably provide enough impetus to confirm a stronger backwardation in both gas and power, despite the good renewable generation levels recently. However, oil is less convincing in the short term, especially if a deal is agreed with Iran on sanctions in relation to their nuclear power ambitions – this may add further supply to the oil market, maintaining the imbalance for a bit longer.
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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