Despite a strong pick-up in prices during the third week of November2019, by the end of the month UK Energy prices ended the month lower than where they started. Whereas spot prices increased slightly across the month, which would be expected as temperatures drop, month ahead prices remained relatively stable, even dropping slightly. Such behaviour is consistent with prices rolling down the contango showing at the front of the forward curves, which for power is only clearly evident during the nearby potion of the curve.
By the end of the month, the forward curves for rolling-annual prices were generally lower across the curve, albeit only a small parallel shift down.
While European gas inventory levels did drop a bit over November 2019, levels are still significantly higher than for recent years, which shows continued good availability of gas.
UK Gas ended November 2019 down a few percent across the curve. Even though demand continues to increase as temperatures drop; total EU gas storage volumes remain historically high and LNG send-out has also been maintained. Prices did pick up during the second half of the month and there was some concern that this more bullish period might follow through to a change in sentiment/structure. In reality, by the end of the month, contango had increased slightly and technically the market maintained its bearish feel. As a point of interest to watch, the contango is encouraging traders to hold LNG in storage, prior to regasification. This action could potential block the availability and utilisation of re-gas facilities and so restrict LNG send-out.
Winter weather forecasts have turned colder, and probably now slightly colder than normal, but not extreme – this, in itself, is unlikely to have a serious impact on prices due to the abundant supply, though could provide some support and volatility as winter progresses. From the gas perspective, the things to really look out for are political interventions, though an extended winter could impact on prices, especially for subsequent years.
UK’s electricity prices again moved in line with gas. The forward curve for rolling annual prices did increase its front end contango slightly but it is still not convincingly in contango throughout the curve.
Nevertheless, a flat-ish forward structure, with a slight contango at the nearby portion of the curve, suggests we should expect electricity to continuing to follow the UK gas lead downwards for the time being. Purchasers who are on a flexible contract should currently should be seeing enhanced returns if buying month ahead.
Historically, annualised electricity prices are now trading at levels approximately equivalent to the past 5-year average, so electricity prices still have plenty of room for movement.
Coal and CO2 prices generally moved sideways during November, which suggests demand for electricity throughout Europe was in line with expectations. GB£/€ forex rates improved slightly during November 2019, on the expectation that UK would provide a clear result from the general election (probably a Conservative majority), though both the £ and particularly the € weakened against the US$ for the same reason; a consequence of the resulting Brexit based on the Conservative agreement with EU, albeit the likelihood of a no-deal Brexit is viewed as low in the market. Of course, this situation may change during December as the possibility of a hung parliament should also not be discounted.
Oil prices continued to be mildly volatile over November 2019, though the impact was only partially felt during the latter parts of the month. As before, we should continue to be watchful as the oil market is still sensitive to various political interventions. Surprisingly one of the topics creating most interest in the oil market is the outbreak of African swine fever, which is decimating the Chinese pig population – why is this an issue, because of the probably impact on the US/China trade negotiations!
What’s the outlook?
Winter weather forecasts are now becoming clearer, with expectations for a wetter and slightly colder than normal winter. There is also a good chance of snow before Christmas, maybe even a white Christmas (a relatively unusual occurrence in most of UK), and the probability of the winter being extended in to March has also increased. January and February look much more variable; a mixture of mild and wet with some cold periods interspersed.
Weather forecasts apart, market signals continue to be more bearish than anything else with medium-term technical analysis and fundamentals looking weak.
As a word of caution, annual gas prices are now clearly below the past 5-year average, though we would still need to see a drop of ~25% before getting to the lows of 4 years ago. Also, we should be mindful that while the gas market maintains its bearish stance, traders will be increasingly sitting on the short side, meaning the sensitivity to bullish news will increase as prices approach the historic lows.
Put together it means the recent strategy of holding back the bulk of purchases has been vindicated while the purchasing of some, albeit limited, portion of forward volumes remains prudent in case of any bullish surprises.
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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