Energy prices dropped across the board over the month, printing new lows for many contracts.
December 2014 can mainly be characterised by lower than seasonal normal demand putting downward pressure on prices throughout the month. LNG imports were also good, with many cargoes arriving between Christmas and New Year. The odd cold snap prevented a total price collapse but did not provide enough support to maintain price levels – liquidity was particularly low during the second half of December as many market players appeared to take an extended holiday. Storage levels remained at comfortable levels and unless weather forecasts indicate prolonged colder weather, rather than the current warmer than seasonal normal tendencies, supply availability is likely to be more than sufficient. The Ukraine/Russia situation remained calm too, helping to keep volatility restrained.
Power prices continued to take the lead from the gas market, even though gas fuelled power generation volumes dropped significantly with coal and nuclear producing the majority of generated power; by the turn of the year, wind production was also greater than gas. Coal prices weakened too and only CO2 prices bucked the trend finishing the month slightly higher. December also saw the first of the new UK capacity auctions, the provisional results of which appear to give little or no encouragement for new capacity though has provided an apparent subsidy to existing producers, who have been losing out due to other policies – the success or otherwise of these auctions will be seen in due course but is likely to result in the retail and wholesale markets becoming further divorced from each other as subsidies (recovered by taxes and levies) form an increasing element of retail prices.
Brent re-established the downward trend with prices eventually dropping through the $60/bbl level, the first time since 2009. However, as prices moved down below this level there has been an increase in net length (WTI and Brent open-interest) from the speculative community, indicating some view that prices shouldn’t go too much lower; interestingly, US Natural Gas still showed a growing net short position owing to a continued strong production growth in December.
What’s the Outlook?
Albeit demand will increase after the holiday period, the good supply position and weak oil prices are likely to ensure UK energy prices remain below historic levels for this time of the year. The forward curves are similarly looking weaker than last month (i.e. tending toward a more bearish contango), which indicates a continued bearish sentiment. On the assumption that OPEC keep production about current levels for the immediate future, many analysts believe the fundamentals of the oil market will remain weak for the next 6 months. In fact, if Brent maintains about $58/bbl, it will be on par with historical averages; for a more sustained fall, to say $40/bbl, global demand growth would have to be significantly less than predicted at 3.6%. Storage levels are currently ample so any price volatility should be dampened unless we get some unexpected and serious supply disruption.
Dr Tony West has worked in a variety of institutions at a senior level; most recently as Head of Power Business Coordination at Gazprom Marketing & Trading, spearheading Gazprom Group’s move in to gas-fuelled generation, having developed the group strategy in the context of securing demand for Gazprom’s gas, and prior to that as Head of Trading at Scottish Power.
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