Prices were much more volatile this past month (April 2019) with the recent bearish run coming to a halt. Whereas far forward prices (greater than 2 years forward) have not changed much month on month, rolling annual prices in the early, more prompt, years have increased. So, forward curves for the rolling annual prices, maintained their contango structure at the front end of the curve though showed a more backwardated structure further forward. This underlines the confused sentiment in the market of prompt weakness but nervousness whether this weakness will follow through beyond 4Q19.
Having said that, prompt-month prices have stayed quite low as supply demand fundamentals for this summer still look well supplied; in particular, gas storage levels are historically high and LNG send-out (due to continuous LNG cargo deliveries to Europe) have been plentiful again.
April weather, on average, was more in line with seasonal normal conditions, i.e. changeable, so we experienced both warm and cold periods.
Forward annual UK gas prices increased during March 2019, primarily due to inconsistent and unreliable supply from Norway – some might say this was deliberate action from the Norwegians, to remind the market players that Norwegian gas is necessary to ensure sufficient supply, even in a year when storage is plentiful.
The forward curve for rolling-annual prices maintains a prompt contango structure, though longer dated prices are displacing slight backwardation; supporting a weak sentiment for the coming summer but expressing some concern whether the gas price weakness will continue beyond that. Fundamentally, storage levels remain comfortable across Europe and we continue to see several LNG cargoes scheduled to arrive at European regasification terminals within the coming weeks.
Technically, signals have become less definitive recently and demonstrate increasing uncertainty in the market
The UK power forward-curve for rolling annual prices is similar in structure to gas demonstrating the significance of gas to the power market. However, with intermittent renewable power generation being increasingly relied upon to meet day-to –day demand, volatility in the power market will continue to be high going forward, particularly in the prompt weeks.
Power supply fundamentals are not quite as good as for gas, though as long as weather conditions are in line with seasonal norms, supply is good, however, extremes could put pressure on supplies.
Technical indicators, as for gas, look bearish in the short term but medium and long-term signals are confused, looking for clear direction.
Strong oil market prices since the beginning of the year continued through April 2019, and have helped provide support for UK energy prices, particularly longer-term price levels. However, with oil prices driven more by political uncertainties than anything else, many oil analysts predict lower oil prices in a years’ time due to increasingly good supply fundamentals – perhaps Venezuela apart. Nevertheless, with Brent crude oil maintaining clear backwardation, the market sentiment is clearly bullish for now.
What’s the outlook?
Current short-term weather forecasts anticipate another cold spell early May, before returning to more seasonally normal temperatures for the balance of May 2019; this should stabilise prices and give us the opportunity to decide if prices will return to a bullish backwardation from 3q19, or whether the good gas supply, and generally lower demand during UK summers, mean fundamentals will remain over-supplied. In the meantime, there seems little doubt that summer months will continue to roll down the near term contango, so giving some time to decide whether to accelerate forward purchases or not. One issue to help with predicting the prospect for the winter is the LNG market, specifically whether Asian prices increase enough to divert cargoes from EU towards the Far East – currently it doesn’t look that way, but we can’t rule out the likelihood.
With prompt month prices holding down, there is still no pressing need to change strategy to longer-term purchases, but it maybe we do decide to accelerate the longer-term purchase as we move in to 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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