After a quiet start to the month, September 2019 will be remembered ultimately as a very volatile month, though by the end prices were only up a few percent for electricity and a bit more for gas.
Three, potentially very bullish, pieces of news hit the market all at the same time and really tested the resolve of what had been an increasingly weak market, from a structural, technical and fundamental perspective. As the market was starting to recover from this news, it was followed by news of a drone attack on a Saudi Oil facility. Initially prices were buoyed but as the market digested the news, and the reality of the extent of the various news items was established, prices stabilised somewhat.
By the end of the month, the forward curves for rolling-annual prices, while a bit higher than last month at the prompt end of the curve, were only showing a modest change in structure, if any real change at all. The developing contango has halted, though this indicates a ‘pause for thought’ in sentiment rather than a clear change.
Nevertheless, we are still experiencing the consequences of the very comfortable European gas inventory position, which shows no sign of abating; fundamentally, despite all the bullish news, the UK/EU markets still look well supplied, albeit sentiment is confused.
UK Gas, the market that responded most to the various news items, ended September 2019 about 6-10% up. Some of this was just due to greater demand as we move in to autumn, and some was a risk premium as a direct consequence of the various news items, which in one way or another all had a potential supply/demand impact. Nevertheless, EU gas storage volumes have remained historically high, so (day-ahead) spot gas prices stayed low (in the range 20-30p/therm), and LNG deliveries to EU have continued to pick up.
With gas supply good, it will take some sort of serious supply or demand shock to seriously reverse sentiment – the potential is there with the issues reported:
- Early curtailment of supply from Groningen
- Restriction in Gazprom’s pipeline supply access to Europe
- Potential shut-down of French Nuclear power Generation
- Potential shut-in of Saudi Oil supply due to drone attack
However, to date none of these issues have resulted in the potential impact feared by the news media, though there is no doubt the market has been spooked and a risk premium remains. As a consequence, we have seen a partial reduction in the contango though no sentiment reversal at this time. In reality, we will have to wait and see over the next month for longer term direction – as more time goes by, without further escalation of the issues, the greater the chances we revert to the previous weak sentiment.
As we move through autumn to winter, the focus on winter forecasts will become increasingly important – currently winter looks to be mild and wet on average though changeable with an on/off cold/mild Winter (December and February mild, yet January and March cold).
UK’s power prices, while they were volatile, did not respond at the extremes that might have been expected, in comparison to gas, when hearing the recent news report. Primarily because, the main power impact was the state of the French Nuclear power plant, which did not appear to be a, so-called, ‘type-fault’ related to the nuclear facility but more an issue related to the more easily accessible steam turbines. Also, coal and CO2 prices, while volatile were not that greatly impacted (ending the month lower in general) and GB£ forex rates improved on the expectation that UK would agree a Brexit deal with EU.
From a structural perspective, sentiment did strengthen marginally, though by end September signals were not indicative of a reversal – like gas we will have to wait and see; we will probably need to see more bullish supply/demand impacts before the market clearly flips to backwardation.
Oil prices were reasonably volatile again during September 2019, driven primarily by the reports of drone attacks on Saudi Oil facilities. At first, reports were that Saudi oil supply could be severely constrained. Furthermore, there was increasing evidence that these attacks were carried out with some Iranian involvement. After the Kingdom of Saudi Aribia quickly reassured the market that no oil shipments would be skipped, and production capacity would be restored, the market stabilised. The market eventually turned decisively bearish by the end of September following a string of economic data and forecasts showing that global economic growth is slowing down.
What’s the outlook?
Market signals are currently rather mixed, with a hint of bearishness, depending where you look. Short-term fundamentals look weak, whereas structural and technical signals are either mixed or in limbo, waiting for further direction. Weather forecasts appear in line with seasonal norms and there are few signs of an early winter – though all of these can change. 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 (though it shouldn’t be ruled out that EU lose patience). All in all, it is probable that if the weather forecasts remain as they are, and there is no new bullish news, then the market may revert to a clear weak sentiment, especially as the recent bullish spike will have stopped out many of the traders holding short positions.
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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