Power
UK power fundamentals remain largely unchanged from March when prices were 15% lower. General bullishness in primary fuel stocks (gas, coal, and carbon) has directly impacted on prices despite low summer demand levels. Concerns over the ability to meet winter peak demand have, as yet, not seen winter power pricing gap above fair value (based on the increases in primary fuel cost). This could be one to watch as we move closer to delivery particularly if feedstock pricing and plant maintenance outages remain high.
Power prices remain susceptible to a “double whammy” in 2017. Until now, bearish commodity prices have masked the dramatic EMR-led increases in non-commodity charges for electricity consumers. With the commodity in a more bullish mood, those taking prices for 2017 and beyond could be in for a nasty surprise.
Economics and Geopolitical Conditions
The opinions offered in March on external influences remain in play today. Economic growth continues to hit headwinds with the IMF downgrading 2016 global growth to 3.2% from 3.4% in its World Economic Outlook update (April). Chinese data has proved patchy with import/export and PMI indicators all suggesting that recovery is stalling, lacklustre at best.
The politics of the Middle East still present real concerns for the free passage of oil and gas although Iran and Saudi Arabia seems to have stepped back slightly from the proxy wars in Yemen and elsewhere.
Brexit is almost upon us, or at least polling day. Currency volatility is a given; sterling has recovered significant value against both the euro and the US dollar in recent weeks, but the markets are forecasting swings of 10% to the downside and 5% on the upside from current values dependent on the outcome. Ultimately, an exit will put significant upside pressure on gas and power prices as a result of weaker sterling.
The US election looks to be shaping up to be a straight fight between Clinton and Trump and, in terms of this summer, the direction of the Federal Reserve is in more focus. The latest interpretation of Fed policy is to expect a further increase in the reserve rate this summer. A stronger US dollar may well keep dollar-denominated commodities capped.
Conclusion
The outlook looks finely balanced between short-term supply side issues, bullish momentum, and a more muted long-term prognosis. Prices are typically 15-20% higher than the January lows and 10-15% higher than they were at the end of winter. Short-term issues can dominate pricing longer than expected and take longer than they should to unwind. For those taking prompt and short forward pricing this summer, prices look to have more down than upside, barring unplanned issues, while winter premiums again look undervalued against the current prompt. Prices looked cheap last quarter, and that proved to be the case. Again, fundamentally, the supply side in UK gas looks comfortable, UK power less so. Current prices look, historically speaking, to offer good value despite recent movements.
Written By – Jason Durden
