Winter 2017, History Repeating?

           Energy Markets

As the winter season gives way to summer, what were the decisive points and lessons from the winter? What can we take from them for the development of summer pricing and, more importantly, what clues do they derive for winter’s future?

This winter was one that kept participants on their toes across Europe’s gas and power markets. Low hydro impacted multiple power markets, and the now usual panic about French nuclear capacity in late summer drove prices to year highs before the now customary sell-off in January as it transpired, yet again, that the politically charged French market could muster enough capacity to more than cope with peak winter loads. The French are expected to publish Hulot’s green deal vision that will lead to an announcement by the end of 2018 of how many nuclear power stations will be shut and by when to meet the 25% reduction in the fleet’s output promised by 2025. So, don’t expect anything other than the usual Q4 fun and games in European power markets for a third successive year.

Looking specifically at the UK, LNG deliveries were again in very short supply, and winter sendout was minimal. Between October and March, Qatar gas deliveries into South Hook numbered six with just one delivery in November and December and nothing further until late February. Price spreads between the NBP month-ahead replicated the peak winter levels of the previous year, maintaining a minimum of 10 pence and peaking at 36 pence. The South Hook experience over the last two winters shows clearly that Qatar gas will openly arbitrage opportunities to divert cargoes to higher price markets, leaving its JV South Hook regassification plants largely idle. On the positive side, cargoes from Trinidad, the US, and lately Russia pushed cargoes into the UK via Dragon or the Isle of Grain. At approximately half the size of a Qatari Q-flex vessel, these seven North Atlantic basin deliveries were themselves price taking high UK prices.

The weather impact hit Europe late this season with seasonal demand peaks hitting multi-year highs at 400mcm/d and 50GW at the end of February and beginning of March. Ultimately, these exceptional demands proved the resilience of the market mechanism to cope with multi-year highs. That said, it must be pointed out that this peak was in no large part helped by the high levels of wind on the grid. At 10GW, the power grid was comfortably supplied as gas prices triggered the fuel switching price, signalling coal to run hard. Perhaps the one takeaway here for future winters is that, had the very cold spell been accompanied by high pressure and low wind output, the call on gas-for-power demand would most likely have pushed the Gas Deficit Warning (GDW) into a Gas Deficit Emergency (GDE), at which point rolling power cuts would have been a reality across the UK as the regulators sought to protect life and prioritise LDZ domestic supplies.

Since the season switches to summer and passing of April’s retail demand, the markets have proved resilient to technical indicators, suggesting that the bullish run through March was overdue a correction. These were particularly acute in the illiquid power markets, but the clues to this resilience are in plain sight if we look. Winter 18 forwards have held higher ground to mirror the spot outturns from winter 17. The day-ahead gas market averaged 55 pence per therm and power just over £52.10MW.  The notable move year-on-year in the power forwards is perhaps the lack of movement. UK winter baseload outturn through 2016 and 2017 has been flat, averaging either side of £52MW. European gas, however, hasn’t been flat with Winter 16 outturns at 48.30p per therm and winter 17 up 13% at 55p per therm. Given the context of steep moves up in oil through the same period, power may well have additional room should the bulls wish to push it, especially against the recent resurgence in carbon pricing.

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.