UK Energy Market Update
Despite gas stabilising over the last few weeks and the forecast severe weather not coming to fruition, short-term energy prices remain unusually high.
The electricity commodity market is in a state of backwardation which means near-term contracts are more expensive than those that are further out. This is a result of short-term market pressures. Normally the energy market follows the contango curve owing to the premium risk built in over the full contract term.
January forecasts of ongoing below seasonal norm temperatures saw the UK’s healthy storage levels run to near emergency levels. This impacted both near-term and medium-term prices because of the risk that the UK would not be able to build up it is storage levels over the summer to cope with next winter. As the ongoing severe weather did not come to fruition a lot of the risk has drained out of the market.
However, this has not restored the contango state which points to another fundamental factor propping up near-term prices. The uncertainty around the UK cost of carbon will be a constant driver for all durations currently and it is unknown when any further information on this pricing mechanism will be announced.
UK gas contracts crashed off last week as temperature forecasts were also significantly revised across Europe. This is backed up by strong LNG imports expected over the coming weeks. Both these factors have taken the reliance off local storage withdrawals going forward after EU levels reached 25% lower than this time last year.
Although temperatures are forecast to be above normal over the near-term, the market will still be sensitive to any changes in either Europe or Asia. A small surge in prices was briefly seen last week as some unplanned Norwegian outages, lower Russian flows, and a reduction in U.S. feedgas flows worried the market, however this was short lived.
Prices should begin to stabilise in March as the weather continues to improve.