So That Was Summer 2017, What About Winter?


It may only be the first week of August, but following a warm and dry June / July weather patterns have been much more autumnal of late. So, with it feeling more October than high summer what has been driving gas and power prices and why?

As with all gas and power contracts, the quarter four 2016 French nuclear spike in markets pushed UK summer 17 forwards to 2-year highs. This has meant that with pressure from falling oil markets 2017 has largely been a story of contracts normalising to lower levels.

As the summer has developed supply conditions have remained strong, oil prices weak and until very recently, were framed by a largely rangebound currency. Summer forward gas prices have, thus far produced a spot price just above of 37.50p/th, which to put into context is 14% lower than the 2017 average Summer season price at 43.50p/th. This outturn can be seen to be reflected in the forward prices for Summer ‘18, which have thus far been capped below 40p/th. On the supply-side gas has been supported by strong Norwegian, Russian and UK flows, along with a rebound in LNG availability following the dearth of European deliveries through last winter. More recently heavy maintenance and further downside in sterling have seen prices rebound somewhat but largely the spot and remaining summer gas forwards remain sub 40p/th on a mixture of modest demand and adequate supply.

Turning to power prices and in line with gas price development through Q1 ‘17 the Summer forward price averaged £43.50MW, touching a low of £40MW before expiry. Overall those with an appetite for the spot have been rewarded, but less well than in the gas market. Averaging £41.26MW thus far the benefit is little more than 5%, with the potentially difficult month of September still ahead. The narrative around power price development is one aligned in the first part of the year with falling oil, gas, and coal prices, but whereas oil and gas continue to trade at lower levels coal has pursued its own path. Supply problems in Australia, China and South Africa and higher global demand have pushed prices for 2018 to two and a half year highs. Prices are not far from the Cal 17 peak seen in November last year. Despite the lack of coal fired summer generation in the UK, the effect on our neighbouring and critically interconnected European markets has meant that impact has transferred into our power prices. Overall this summer has been one defined by the rise in renewables. Solar’s growth has meant that with wind renewable output has routinely vied with nuclear for the number two generation source in the UK this summer. Recent price strength in remaining months can be attributed to both a general rebound in the energy complex, oil, gas and of course coal, renewed weakness in Sterling and uniquely, a September maintenance schedule that will see margins forecast at their tightest for the remainder of the year.

Turning now to an early view of the winter months, we know that margins look adequate in power markets following the Capacity Market work put in place by the National Grid. Gas looks to be plentiful with both the Russians and Norwegians set to bring more gas to market and LNG availability continuing to rise. Drill down into these headlines and it gets a little murkier. The Grid has ensured that generation capacity exists but capacity and flowing MW’s aren’t the same. The cost at which these extra MW will hit the system will be determined by the market and that fundamentally means higher volatility in spot and short-term forwards. LNG capacity remains on the rise but again, as we saw last year the arbitrage opportunity for loads could be high should unplanned maintenance or a demand spike materialise anywhere across the globe. Current futures prices, despite some strength in the last week or so remain good value against 2017 averages and breakouts below key support levels have proved futile in both winter power and gas forwards. Summer forwards, whilst seemingly offering less value, compare favourably with current spot prices for summer ’17. We expect that prices will remain susceptible to upside in Oil or Coal prices. The one macroeconomic gamble is centred around the race to the bottom in the dollar. Recent oil strength has little to do with OPEC rhetoric and more to with a wholesale downward revision in the value of the dollar. Add to this BREXIT and sterling woes plus geopolitical tensions in the Middle and Far East, and it is difficult to see low volatility levels remaining through the peak demand periods.

For those brave enough to sit out the inevitable squeeze on prices as the peak contracting round approaches, Q4 may just offer some improvement to current price levels based on likely supply demand balances. However, the rewards for seasonal buyers looks less clear cut and I for one wouldn’t be advocating short positions ahead of a peak demand period with price making marginal sources of generation and supply. Reasonable forward pricing, the first winter without proper rough gas storage availability and new power capacity arrangements means that this winter has many new risks that we haven’t seen before.

Jason Durden

A former equity derivatives trader with Citicorp and RBS, Jason has worked in energy for 14 years. As well as managing trading teams looking after gas and power energy funds and multinational European contracts, Jason has personally risk managed some of the UK’s largest flexible gas and power contracts.