Last week saw the UK gas and power markets return to the lower end of the price range seen over the past month. The weakness was particularly pronounced at the front end of the UK gas market which saw the July NBP gas contract expire at 24.18 p/therm, whilst July baseload power expired at £37.28/MWh. Winter 19 gas and power contracts also sold off throughout the week, with Winter 19 NBP gas contracts falling below the 50.00 p/therm mark and testing the lows seen two weeks earlier.
The carbon market has been one source of support for the UK power market. Last Wednesday saw EUA (carbon) prices trade back up above €27.00 towards the all-time contract highs of €27.85. The bullish picture in carbon is one of the reasons why Winter 19 baseload power is only down c. 19% from the highs seen last year (highs: 68.28 £/MWh, current: 55.25 £/MWh), whilst Winter 19 gas is down c. 33% (highs: 74.00 p/therm, current: 49.850 p/therm).
Oil markets saw gains of c. $2.50/barrel last week following increasing tensions between Iran and the US in the Strait of Hormuz. An escalation of this situation could clearly have an impact on UK energy markets, however in the short term we think current supply/demand balance remains well entrenched.
Looking forward, the UK energy picture remains bearish with gas storage levels in the UK (and Europe) still well above any of the levels seen for the last 5 years. Across Europe, the situation in gas remains the same with plentiful supplies available. Temperatures in Q4 will be of upmost importance in determining gas prices next year, as they will dictate whether storage levels see some depletion, or whether the current length is able to roll into Q1 2020.
This morning the front end of the gas and power curve has seen gains (Aug 19 NBP Gas, + 1.070 p/therm, 4.0%) whilst further down the forward curve, the market is more lacklustre with little change from settlements on Friday. Carbon is once again the big mover, with the Dec-19 EUA contract up €0.64 from settlement on Friday, currently trading at €26.85. On the back of strong oil and carbon markets we’d expect to see the gas and power curves being robust in the short term.