Energy Broker: February 2018 Market Report:
So, the weather did play havoc with the UK’s wholesale energy markets in February 2018, though just during the last week, and in reality, only impacting the prompt market; the day-ahead and spot prices making historical high prices. Whereas front-month (March 2018) prices did rise somewhat too, annual prices were hardly impacted and finished the month pretty much where they started, essentially within bid/offer range.
Nevertheless, despite the apparent volatility, both the gas and power forward curves for rolling-annual prices changed little, making future direction difficult to call; both curves are still in slight backwardation. Oil moved down from its recent highs in January while maintaining its backwardation also.
The gas market was dominated by the weather this month. As soon as mid-February weather forecasts highlighted the impending Siberian influence and temperatures at nearly 10oC below seasonal norm, prompt prices jumped, culminating with National Grid’s first ever ‘Gas Supply Deficit’ warning at the turn of the month. This coincided with various supply issues and high demand, both due to the cold temperatures.
For most consumers, there wouldn’t have been any price issues unless they were on default pricing or were contracted to buy on a day-ahead basis, which would be considered by most as a very aggressive strategy and not something Pulse would recommend, even in the deepest contango market. However, a few buyers, with DSR (Demand Side Response) arrangements, may have been called upon.
In reality, National Grid managed the constraints well, which in fact gave some confidence to the market that UK can operate without Rough storage to fall back on. Accordingly, and despite the huge spike in prompt prices, forward prices were remarkably stable and throughout the month changed little both in price level and slightly backwardated forward structure.
The power market essentially followed the weather led gas market with high correlation this month. Any additional volatility that was seen in power was partly due to renewable (wind and solar) generation, showing some instability due to the changing weather conditions, putting greater pressure on gas fired generation to meet demand increases.
All forward prices were very similar to this time last year and forward curves changed little.
In February the oil market players congregate in London for IP week. Sentiment expressed at the various public forums indicated a predominantly constructive outlook over the 2018-19 period. One consistent factor encouraging analysts and traders alike on the long side is the level of backwardation on the forward Brent curve. However, with prices in January having risen to levels not seen for several years, US production has increased; prices ultimately ended the month down.
Nevertheless, several analysts now see the oil market in reasonable balance, though volatility will be driven by the increases in US supply growth and how this is set off against economic activity and expectations of further decline in Venezuelan production.
What’s the Outlook?
This month, we have added an additional chart to show how the prices for calendar-year 2019 gas and power have moved during the past year or so. Since mid-2016, the market has generally moved up. Market conditions encouraged some forward buying, which some took advantage of, though buyers will now need to consider how best to position themselves for their next contract renewals. However, in recent months there have been signs that the market, particularly the power market, may be losing some of its momentum. Of course, it is still possible to buy forward years at a discount, due to the backwardation in the rolling annual forward price curve, but if the market was to turn, and even possibly flip to contango, the future strategy would be impacted. Unfortunately, current market conditions make it especially difficult to predict, though buyers may in fact be better off waiting to see whether the market does reverse in trend and revert to contango before fixing forward now.
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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