During July 2018, UK energy prices mostly rolled up the backwardated annual forward curves, meaning prices generally increased slightly, by the end of July 2018. There were some exceptions, essentially nearby months for power were slightly more bullish than gas. Also, during the month, prices did show reasonable volatility, particularly during the first half of the month, driven primarily by higher coal and reduced wind power generation and then reflecting changes in the oil market.
The forward curves for rolling annual prices maintained their backwardated nature, slightly reduced in the case of gas, though whether this is sufficient to indicate a real change in sentiment would be premature.
UK Gas prices, although with some day to day volatility during the first half of July, generally maintained levels; nearby month prices did drop off a fraction more than forward prices. Early month volatility was driven by various factors including higher demand for gas fired power generation (lower wind power production), increasing coal prices globally and various outages and other demand pulls (storage buying etc…). Sentiment from weaker oil fed through later in the month, which pretty much neutralised earlier price rises.
Changes to the forward curve for rolling annual forward gas prices were minor though did reflect some signs of decreasing backwardation, potentially indicative of a slight change in underlying market sentiment; however, it is probably too premature to view this as significant.
UK power prices rolled up the backwardated rolling-annual power forward curve, maintaining an almost equivalent market structure to last month, indicating no real change in market sentiment. Some might view this as a slowing in market momentum though without further evidence it is more likely to be wishful thinking. In the meantime, with most market signals remaining supportive of higher market movements, taking any unnecessary risks should be avoided. The historically warm weather and general high-pressure weather conditions continue to demand electricity from thermal sources (primarily gas fuelled generation) and these abnormal circumstances helped prices to maintain buoyant with the market becoming reliant on gas availability; this time of year is usually considered the turn-around season for gas plant when demand for gas is lower and prices are traditionally lower.
Oil prices jumped around a bit during July 2018, though, by the end of the month were slightly lower. The oil supply demand balance is rather delicate at the moment with small changes in US production or OPEC supply flipping the analysis from too long to too short very easily. Nevertheless, prices as expected have reverted to a more reasonable $70-$75/barrel range for the second half of the year; unless of course there are any further unforeseen disruptions.
What’s the Outlook?
While most market signals remain supportive of high market movements, some are again beginning to show signs we may be reaching a top. While we await confirmation of any sentiment change, we should maintain discipline and continue to ensure we are not exposed to near month volatility plus continue to take advantage of the backwardation by buying as far forward as we can.
While recognising we have had some very good weather this summer, it is now the time analysts start looking at longer term weather forecasts for any indications what the winter might hold. Currently, most long-range weather models are providing signals for a seasonally warm winter, but this can still go either way, with some weather analysts pointing to the low solar activity (sun-spots etc..); often the so called ‘solar minimum’ is coincident with very cold winters; this is something should be watched!
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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