Risk Management Team Market Update

Market Overview

UK Market factors told 2 individual tales this week, one each for the near and far price curves.

The week opened with a further jump in oil price. After closing at just under $53/barrel on Friday, Brent crude rose to over $56/barrel by Monday afternoon.

This continued to pull up far-curve prices (from Winter-15 onwards) by around 50p/MWh, with similar movement in near-term prices as colder temperatures and low wind output combined to push Day-Ahead up a full £7/MWh from the previous week’s close – up to £50/MWh. The Sleipner gas termination and Kollsnes gas plant both cut capacity as they underwent unplanned maintenance that was expected to last until the end of the week.

A lack of supply was compounded by the continued absence of two nuclear reactors, putting a strain on demand as gas for power generation increased to 34{f28ba8b7cd80e2a72e2e4b0140ea6524aee5e72b0af8287d84bbf0c79910665b}.

The short-term situation was flipped by midweek with the news of improved weather forecasts through the end of February and an increase in wind generation. Though demand concerns were not completely alleviated, gains were limited on the near curve thanks to a softening in gas equivalents. The front month (March-15) remained around £39.3/MWh through Wednesday.

Further into the future, the firming of Brent crude around the $55 barrel mark provided steadying support to wholesale prices on the far curve and seasonal contracts continued to rise.

Thursday brought another significant shift, with a multitude of factors lifting both near-term and future prices. A cut in Chinese bank reserve requirements injected cash (and liquidity) into the markets, boosting activity in all periods.

Another revised weather forecast (this time suggesting temperatures will indeed decline into March) and news that Rough storage will undergo essential maintenance at some point in the next fortnight – reducing capacity by up to 50{f28ba8b7cd80e2a72e2e4b0140ea6524aee5e72b0af8287d84bbf0c79910665b} for a 12 hour period – saw supply concerns return and the market react accordingly.

March-15 broke through £40/MWh and up to its highest levels in a month. Summer-15 fared even worse, gaining more than £1/MWh and surging from below £42/MWh all the way above £43/MWh.

The far curve took a further hit as news filtered out surrounding escalating tensions between Russia and Ukraine. World leaders are scheduled to attend peace talks in Moscow, a signal of increasing concern backed up by reports of a reinforcement in NATO’s collective defence and strong statements from the US.

Periods all the way out to 2017 suffered, mirroring the £1+/MWh gains experienced on the near curve. Winter-15 and Summer-16 rose to £47.50/MWh and £43.80/MWh respectively.

To a certain extent the shift was temporary, fuelled by participants who looked to close off periods during the Bull Run. With an LNG tanker due to dock on Monday and a balanced system, an improved UK supply outlook saw near curve prices give back some of Thursday’s gains. Further out on the curve, prices remain buoyed by rising oil prices (Brent crude up to $58/barrel) and Summer-15 traded at £44.10/MWh. Winter-16 rose further still, gaining c.£1.20/MWh since Thursday and climbing to £48.5/MWh.

 

Outlook

Bearish sentiment endures through most near-future contracts, and the fact that both gas and power prices have fallen back at the end of this week indicates the spike in prices could be short-lived.

Short-term supply issues are not unexpected at this time of year, and the near curve should settle further as seasonal/weather issues dissipate closer to summer and LNG deliveries still happen.

Unrest in Russia-Ukraine and threats to long-term oil investments (caused by recent violence in Libya) has given support to prices on the far curve. Inspired will be monitoring both situations closely, as any resolutions or easing of tensions could combine with a softening short-term market to pull prices back down through the curve.