Energy prices were reasonably steady over the month, dipping a bit during the month only to recover, eventually picking up a couple of percent across the month. Brent prices declined again, making even lower lows.
November 2014 can mainly be characterised by mild weather and a generally good supply position, including reasonable levels of imports. Prices were mostly held down in a month that can often set the tone for the rest of the winter; assuming there are no subsequent supply surprises or an unexpected swing in weather conditions. As temperatures cooled down towards the end of the month, though still well within seasonal norm, the market tested the upside and faltered, anticipating more seasonal weather in December. The Ukraine/Russia situation appeared reasonably stable too, helping to keep any real upturn at bay.
Power prices naturally followed gas with high correlation for most of the month, though power prices did show a bit more independence towards the end of the month; power prices took some support from the continued delay in the return of nuclear stations, combined with an outage at Torness. Stronger CO2 and coal prices also supported the power prices towards the end of the month. Peak generation capacity margins held up with gas and coal generating around 32% of the UK demand each. There was also sufficient CCGT availability to meet needs when wind feed was low. Both the French and Dutch interconnectors have been importing at full capacity recently, adding to the system ease.
Brent held steady for much of the month and then took another drop towards the end of November when OPEC decided to take no action on prices, though this was largely anticipated by the market. New lows were posted again. Since July, Saudi Aramco has steadily lowered its OSPs, for both Asia and the US, in response to lower demand for its exports, pushing the volume-weighted average OSP to a discount for the first time since 2010.
What’s the Outlook?
Some pick up in energy prices may be possible over the next few weeks as weather forecasts are beginning to look a little more seasonally normal, though probably not cold enough for most of us to see a white Christmas. The forward curves are also looking slightly stronger than last month (i.e. slowly moving toward a more bullish backwardation, perhaps), which could indicate a growing bullish sentiment. However, storage levels are currently ample so any price volatility should be dampened. Oil prices could drop further; a recent analysis by a major investment bank has shown that oil prices can fall another 20% before it starts to impact the credit rating of parts of the US energy sector; who being much more responsive to the short term oil market than the ME and Russian producers, could put a WTI floor price at $60/bbl. We should not forget that the markets are still edgy about Ukraine and the ‘quiet’ there only serves to create some nervous expectation in the back of some traders’ minds that something will happen at the turn of the year – it won’t be the first time!
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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