March 2019 could not have been more different to March last year – no ‘Beast from the East’ for starters, in fact we experienced some quite balmy temperatures for the time of year, which were generally above seasonal normal, and prices continued to drop. Forward curves for rolling-annual prices, especially for gas, flipped to contango.
Fundamentals remain good from a supply perspective and technical indicators were generally indicative of down-trending markets.
While April weather may reflect more seasonal normal conditions, i.e. changeable and still some risk of a cold periods, we are unlikely to experience a significant change in sentiment especially if the markets continue to become more contango in structure.
Forward annual UK gas prices dropped throughout the curve during March 2019, with one year forward prices lower by about 10% and prompt/spot prices were even weaker.
Overall, the forward curve for rolling annual prices structurally flipped to contango, confirming the underlying bearish sentiment in the market. Interestingly, the forward curve has now crossed over last year’s, demonstrating how different the market is behaving. Fundamentally, this is backed-up by the current very comfortable supply position across Europe; high gas storage levels and a significant flotilla of LNG carriers coming to European regasification terminals. Technical analysis also suggests we are ensconced in a downtrend, and while we will no doubt experience some market spikes and periods of stability over the short term, in the medium term, without some event impacting supply or other significant change in circumstances the trend should be the consumers friend.
While UK power prices have not been as weak as gas during March2019, UK power prices have also dropped throughout the forward curve. At least out to 2021, the forward curve for rolling annual prices is now demonstrating contango, though further forward, albeit where market liquidity is lower, prices are still discounted.
Power supply fundamentals are not quite as ‘long’ as for gas, though the gas position is weighing on power and during the warm and sunny weather over the last weekend of March, spot power prices did go negative for a period – while this might sound good for prices in the short term, it is not a good investment signal, and in the longer term too many of these negative price days will eventually take its toll.
Nevertheless, technical indicators for power do confirm nearby season contracts (Summer19, winter19, sum20 and even win20 to some extent) are trending down in the medium term, though we should expect some volatility and a shallower trend than for gas; the bearish sentiment in the power market is more fragile.
The price for Brent crude oil continued to rise during March 2019; this trend has been in place for more than 3-months now. Brent crude oil is still very much in backwardation, so sentiment is firm. Whereas, most analysts expect oil prices to be lower towards the end of the year, partly due to a global economic downturn, prices have been buoyed recently due to OPEC’s compliant production management and US sanctions on Venezuela and Iran -some analysts are still expecting higher prices in the nearer term, supported by the structure of the forward curve and market technicals, before the fundamentals take over.
What’s the Outlook?
Current short-term weather forecasts anticipate a cold spell before returning to a more seasonally normal month for April 2019, though this should be considered in the context that April is usually unsettled and while average weather conditions are tending towards being warmer the fluctuations in April can be relatively wide and varied. This weather uncertainty, together with the continued inaction by our politicians to settle Brexit could be enough to halt the downtrends we have seen established. However, it is doubtful there will be enough bullish disruption to turn sentiment around, unless some really unexpected event occurs, because of the over-supply (length) in the gas market, and therefore any stabilisation of the market is likely to be a rest rather than a bottoming of the market.
Whereas, prompt month prices are low, as last month, unless there is some pressing need, there would seem to be no need to rush in to any longer-term purchases; holding back from making forward fixed price commitments at this time would seem the best approach, at least for the full volume of requirements.
If any short-term volatility creates too much uncertainty/nervousness for consumers, perhaps purchasing a portion of the forward needs might be prudent. With annual prices still well above 2016 lows, leaving room for the market to fall further, and with month ahead prices low, using the market contango should be beneficial.
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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