Energy contracts on the far curve recently fell to record lows but have spiked in line with various developments across the globe. Energy users looking to secure long term fixed contracts currently have a high risk exposure due to the high levels of volatility seen recently in the markets and may be delaying on purchasing decisions. In fact, the risk is so high, I'd argue that major energy users should be considering moving away from fixed contracts to flexible purchasing. After falling to record lows in early April, Energy prices have rallied and many will view it is a missed opportunity. However, market fundamentals indicate that prices could fall off in the near future, with the possibility of posting new record lows.
Geopolitical tensions in the Ukraine is the main price driver and is solely responsible for the high levels of volatility on the curve. A peace deal between the Ukraine and Russia appeared to have been struck two weeks ago and we saw markets react bearishly. However tensions are escalating with recent news updates reporting Ukrainian forces to have killed 5 separatists which has prompted Russia to perform army training drills on the corner. This, in my opinion is perhaps the only bull in the market at the moment and is inflating contracts on the curve.
Now if we consider the bearish fundamentals in the market, it would appear that more purchasing opportunities may be just around the corner. In response to the Ukraine crisis, Turkey and Russia have agreed on constructing new infrastructure to provide Europe with natural gas supplies. Russia is set to export less to China which could mean beneficial for the EU. Western powers have also held meetings with Slovakian and Ukrainian officials to explore possibilities about becoming less dependent on Russian Energy supplies. Crude oil inventories are at 14 year record lows in the U.S. pointing towards an oversupplied market. Economic sentiment is weak across the globe with China and the US, the 2 largest crude oil consumers positing poor manufacturing and housing data results respectively. Carbon and coal prices have also fallen off and have a big influence on the UK power and gas markets.
In addition to the above, UK gas storage supplies and power margins are strong and are unlikely to pose any concerns ahead of the winter 2014 period. Suppliers have already began injecting gas into storage so the risk premium on far term contracts is low, unlike the last couple of years. Fracking is also picking up speed across Europe and the UK, and investors have been driving huge money into the development and exploration of supplies.
At the moment I would view the Energy market as a bearish market which is solely inflated by the Ukrainian crisis. The situation is currently inflating energy for delivery by up to 5% and is costing major energy users millions of pounds. It currently remains unclear where the situation is heading but rest assured there will be more purchasing opportunities like the ones we have recently witnessed in the next few months.