Quarter One Market Review
It’s been an interesting first quarter in the wholesale energy market where we have been lucky enough to see downward trends since the back end of January.
We kicked off the new year with the market dropping off as milder temperatures over the festive period took some of the premium off prices. However, this was short-lived and prices were soon moving upwards with cold weather being the most significant driver of prices.
Forecasted demand moved above normal seasonal levels because of the dip in temperatures, but strong LNG (Liquefied Natural Gas) production was contributing to good system flexibility.
Oil was still at a low point during January and trading around the $50/bbl mark as the US continued to ramp up their oil production, but with OPEC supply cuts looming, prices soon started to increase steadily to around the $60/bbl handle. There was increased optimisation around a US/China trade deal which was also pressuring prices.
Brexit uncertainty meant the pound was volatile as the prospect of a ‘No Deal’ Brexit began to look slimmer following pressure on Prime Minister Theresa May’s current deal.
As we headed into February the market started to drop in line with comfortable fundamentals such as a well-supplied gas system, warmer weather forecasts and healthy wind generation all of which heavily weighed on prices. We saw day ahead gas (prices set the day prior to business) fall to its lowest level since October 2017 and day ahead power decrease to one-year lows.
LNG flows continued at strong levels and coal prices subsided to the lowest since July 2017, which added to further downside as demand in China remained low following the Chinese New Year.
The oil market strengthened further and reached $65/bbl, the highest it had been since the start of the year. One of Saudi Arabia’s largest offshore fields had been partially shut down which buoyed prices, alongside the oil production cuts and ongoing US sanctions on Iran and Venezuela. Analysts anticipated the average oil price for 2019 would be around $70/bbl.
The Carbon market was starting to make upward moves and impacting prices further out on the curve as the potential of a ‘No Deal’ Brexit looking less likely and therefore reducing the likelihood of the UK leaving the EU European Trading System.
The month of March was estimated to be windy and this in fact was the case, Storm Gareth hit the UK. This drove strong winds and high wind generation, as gas and power prices were reducing. There was also a number of other bearish factors for the downturn in the markets including mild temperatures, influx of LNG, high gas storage levels and all of these led to the system being largely oversupplied.
Day-ahead gas and power fell to fresh 19 and 17 month lows respectively and front-month contracts to a new year low.
Oil broke through the $68/bbl mark with OPEC production cuts being extended until at least June when the next meeting is scheduled and the US/China trade war also supporting prices.
Carbon prices firmed up as well, with this tied to the pound and Brexit developments. Unsurprisingly the pound was dominated by Brexit news as the deadline was fast approaching and parliament looking to have one final push at getting the withdrawal agreement through.
Overall Q1 has seen the market drop considerably from the levels observed in the previous couple of years and has been a favourable time to purchase energy contracts.
Below is a graph from the first quarter demonstrating the downward trend in the gas and power market as highlighted above.
Graph source: Npower Risk Navigator
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Article written by Ben Mason, Corporate Pricing Analyst