In the 20 minutes it has taken me to write this opinion piece, I have probably looked at the trading screens 5 dozen times to see prices on the gas curve fall by around 3%, rather unusual for a Wednesday afternoon. After a heavy trading week when prices have risen considerably, the news is welcomed as we plan for the months ahead which could bring more unexpected volatility.
It’s the middle of Spring and the UK experienced heavy snowfall yesterday, rather odd after the mild winter in which the UK used close to record lows of gas for heating. Even with the little snowfall we experienced in the Winter period, energy prices remained low as the demand never really outweighed the supply. However, this time they have sent the markets spiraling up, with a number of aligning factors supporting the gains. Unexpected outages at UK gas terminals affected gas supply to the UK, most notably from Norway, leaving the UK heavily undersupplied in period where demand increased by over 40%. Unscheduled outages to major Nuclear and Coal plants resulted in increased gas fired power generation levels, another unforeseen factor. The British summer period also marks the start of the maintenance period for major energy terminals around the UK and with these kicking in next week, prices are shooting up as fears around further undersupply for the month ahead gather pace. The reason that this is filtering into contracts for delivery in late 2016 & 2017 is due to fears surrounding the UK gas storage supplies. The summer is a period where gas storage in the UK is replenished after significant winter use, but with the current supply & demand fear, we are seeing doubt around this, throwing risk premiums into contracts.
When looking at the bigger picture, it’s really hard to see why energy prices have reacted this way. My personal opinion is that after touching record lows at multiple points in quarter one, we are seeing sharp, but unsustainable rally on the back of technical buying, which has spooked the market. Crude oil futures have recovered around by around 30% over the past month, but all the fundamentals still point to a relatively bearish market. Oil output is still extremely high as the U.S. fight with OPEC over the majority share, with both parties reluctant to reduce production. Add to the mix that Saudi Arabia are starting to the compete with Russia in the Chinese market, we could see another global battle for oil dominance.
The Pound has weakened over the fears of a BREXIT in the last few weeks, supporting price gains in energy and cross commodities. This is now looking more unlikely with each passing day so there is without doubt premiums in UK energy contracts due to the uncertainty which the referendum has brought. The U.K. GDP for quarter one posted a 0.3% gain over original forecasts, perhaps pointing to an economic recovery inn the U.K. When looking at the bigger picture it is clear the Chinese economy is showing little signs of recovery after a crash in late 2015, with analysts predicting a 30% chance of a global recession in 2016/17.
News recently hit the ground that Russia could be about to compete with Norway in attempt to become the EU’s biggest gas supplier. There were predications that gas prices could fall as low as 15p/th (currently 33 p/th) only 15 days ago. Add to this LNG supplies are in abundance for both the UK & EU coupled with a strong outlook for pipeline gas deliveries, it really is a case of an imminent supply & demand spook which is causing inflation across the board.
My personal view is that the recent gains cannot be sustained. Whilst it is unlikely that contracts will fall back down to record lows posted in January, there will be erosion throughout May should the supply & demand situation return to normal.