UK gas and power markets entered 2021 in bullish mood, as near-term supply fears sent prompt prices spiralling. Volatility on short-term markets reverberated through the curve with Apr ’21 electricity annuals reaching £55.49/MWh, their highest point since September 2019. The moves mean that since the 1st December 2020, front electricity and gas annuals have increased by 16% and 22%, respectively.
A cold (and windless) start to January has seen Day Ahead UK electricity markets trade as high as £145.08/MWh (6th January), compared to December’s monthly average of £54.98/MWh. This spike arrived as National Grid was once again called to issue an Electricity Margin Notice (EMN) encouraging generators to make themselves available due to an insufficient buffer on forecast supply margins.
In a recent blog article, National Grid were however keen to point that EMN’s are a routine instrument and that the tight margins “are not a sign of the future”.
This supply shock has done little to abate longstanding market anxiety surrounding the supply / demand picture in Q1 ’21, largely owing to low nuclear availability in France. In recent weeks these fears have ramped up due to a prolonged ‘cold snap’ which has swept across the northern hemisphere, including Asia, a market that has a heavy reliance on Liquified Natural Gas (LNG) imports. High LNG demand in Asia has pushed prices up to record highs, diverting the fuel away from European markets who have been forced to rely on gas storage to cope with surging demand.
With European gas storage at 71% capacity (compared to 85% at this point last year), there are concerns that an extended depression in temperatures could see gas stocks completely depleted, causing further price shocks.
In addition to a rather bleak fundamental picture, further bullish momentum has extended from the wider energy commodity complex, with global oil, coal and carbon markets all buoyant over the past few months. Carbon prices have already reached record highs this year (2021 EUAs touching €34/ tonne before correcting lower) fuelled by optimism over the post-Brexit trade deal, and expectations of higher European coal burn should power demand remain high.
So what does this mean to businesses?
Well, if you are on a flexible contract, you should be well hedged for Q1 ’21. If not, we advise you consider closing positions, gambling on any markets is unwise, gambling on the British weather carries excessive risk.
For those looking to optimise their fixed price procurement, if your position allows you may wish to hold off and review as we come out of winter. The recent market shocks coupled with longstanding trader anxiety has seen heavy risk premiums bleed into wholesale costs throughout the curve. If temperatures normalise, and the market escapes this winter with European gas storage intact, then markets should sell-off.
There is precedent for this ‘buy the rumour, sell the news’ price formation, with heavy market sell-offs in the first quarter of 2017, 2018 and 2020. However, even if this fails to materialise, it is likely that there will be better times to purchase as we move through the year.
To speak to a member of the procurement team about your contract, get in touch:
Call: 01252 560 379