Apart from a blip upwards mid-month, in response to another attack on an oil tanker in the middle east (this time Iranian), forward UK energy prices generally drifted downwards throughout the month. Spot and front month prices pretty much moved sideways, as prices continue to roll down the contango present at the front of the forward curves; albeit the contango in power is only just evident.
By the end of the month, the forward curves for rolling-annual prices were lower across the curve; a parallel shift down by approximately 5p/therm in gas and a (relatively) smaller move down for electricity, though we did see the slight backwardation from last month flatten out.
We are still experiencing the consequences of the very comfortable European gas inventory position, which shows no sign of abating; in fact, gas inventories continued to build, albeit at a slightly lower rate than last year.
UK Gas, the market that appears to be driving underlying sentiment this year, ended October 2019 about 5% down. Despite greater demand as we move through clock-change in to winter, total EU gas storage volumes have remained historically high, pushing forward prices down. While some of the potentially bullish issues, mentioned last month, still overhang the market, gas supply continues to be good and winter weather forecasts do not currently look to be extreme – a colder winter than normal is unlikely to have a serious impact on prices. There are also no signs yet of an extreme cold spell in the near term; it is actually an early winter that usually has the biggest impact on prices during the rest of winter, not just colder than normal temperatures, which of course has some impact but not as significant. As a consequence, we are seeing the impact of the gas curve contango and as more time goes by, the market is reverting to the previous weak sentiment.
Interestingly, over the past 5 years we have only seen forward rolling-annual prices rise once during the last 3 months of the year (in 2017) – this will not go unnoticed by the trading community.
Please note, gas prices are now trading just 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.
UK’s electricity prices essentially followed gas prices down last month, though while the forward curve for rolling annual prices is still to flip convincingly to contango, it is too early to be as bearish as for gas. Accordingly, there is currently less benefit (than for gas) in allowing monthly prices to roll down the curve (i.e. by delaying flexible purchase decisions to month ahead). Nevertheless, with a flat forward structure and a semblance of contango at the nearby portion of the curve, it is reasonable to expect electricity to continuing to follow the gas lead downwards for the time being, meaning delaying annual purchases should be beneficial. From a technical perspective, both gas and electricity show a bearish tendency.
Historically, it can be seen that annualised electricity prices are still trading higher than the past 5-year average, reflecting the premium electricity prices currently have over gas (primarily the impact of gas inventory levels). Also of note, coal and CO2 prices were generally more stable than UK’s energy prices, which also provides some support for electricity.
GB£ forex rates also improved slightly during October 2019, on the expectation that UK would agree a Brexit deal with EU, even bearing in mind there will a General Election first.
Oil prices were mildly volatile during October 2019, though in truth had little impact on UK energy – even a short-term shut in of the Forties oil field, which had some partial impact on gas supplies from the North Sea, only caused some increased volatility in the spot (day-ahead) gas market for a short time. Nonetheless, we should be mindful that this market still holds a risk premium related to trade negotiations between US and China and the under lying tensions in the middle East, with Iran.
What’s the outlook?
As we move in to winter, the focus on winter forecasts are becoming increasingly important – currently winter forecasts look to be unsettled; a mixture of mild and wet some months with some cold months interspersed (December mixed, January and March colder but with a milder February).
Market signals are currently rather more bearish than last month. Short-term fundamentals look weak, as are technical signals, whereas structurally the market is bearish for gas and still in limbo for electricity.
Politically, most commentators now believe the chances of a no-deal Brexit is low, which is generally supportive for GB£ and dampening on UK’s wholesale energy prices. Nevertheless, the possibility of a hung parliament after the recently announced General Election is highly probably, which will create further uncertainty, which is generally bad for the economy.
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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