Risk Management Team Market Update

Market Overview

While prompt prices opened Monday above their previous week’s closes, they quickly softened thanks to strong wind generation and the scheduled return of the Aberthaw coal plant. With a similar sentiment running through its gas counterpart, March-15 shed almost £1/MWh and falling as low as £40.25/MWh.

This movement was reflected in the rest of the curve, aided by a weak European carbon market and an oversupply of coal – Summer-15 and Winter-15 fell just under the £43/MWh and £48/MWh marks respectively but were somewhat limited due to a lack of liquidity.

Both the near and far curve suffered on Tuesday, as wind generation dropped significantly and two nuclear reactors remained offline (Dungeness B revised to return before the week’s end and Hinkley scheduled for mid-April). Day Ahead rocketed almost £5/MWh to c.£46/MWh and March-15 recovered all of the previous day’s losses.

Gas equivalents were overrun by the bulls following a Gazprom warning that it would shut off gas supplies to Ukraine unless Naftogaz makes further payments, threatening gas transit to the rest of Europe. This was mirrored in the UK power market and exacerbated by a statement from the Saudi Arabian oil minister declaring demand for Brent Crude was rising – the price following suit and climbing to >$62/barrel.

The situation was compounded further in midweek with news that an earthquake struck off the southern coast of Japan. The uncertainty of whether this could result in damage affecting supplies or generation (increasing global demand) put further pressure on prices throughout the curve. Winter-15 rebounded to £48.45/MWh by Thursday, with Summer faring even worse and trading up at c.£44.10/MWh.

March-15 also rose to above £44/MWh (up c.£3/MWh from the beginning of the week) as revised forecasts for colder weather combined with increased buying activity – caused by market participants looking to close positions before the trading deadlines at the end of month.

Fears over short term supplies were alleviated on Friday by Ukraine issuing a payment to Gazprom, however tensions were sustained as Ukraine’s President declared that a military threat remains.

A dip in demand did help gas prices to soften on the prompt, providing downward pressure that was subsequently reflected in the UK electricity market – Day-Ahead power gave up £1/MWh down to £42.50/MWh.

Outlook

Following the political issues between Russia-Ukraine and the unforeseen earthquake in Japan which shook the market in midweek, future prices found continued support from Brent Crude (remains steady at over $61/barrel, backed up by strong Chinese data) and a firming in Coal prices which injected further bullish sentiment into the far curve.

Despite a positive supply outlook (good wind forecasts, strong gas flows from the continent, 2 more LNG deliveries scheduled for next week), some uncertainty continues to linger on the prompt in the absence of a firm resolution to the Ukrainian gas situation.

While there has recently been little solace to find at either end of the curve, Ukraine does continue to remove weapons from their Russian border as part of the ceasefire, and news that Germany are willing to back loan extensions for Greece should help ease global political issues.

As we move into March and April becomes the front month the recent run on prices should also dissipate, and if the robust supply outlook prevails and LNG deliveries arrive as expected we should see prices of short-term contracts begin to fall back again as we get closer to the Summer period.