Weekly Energy Market Update - 22/07/2019
22 Jul 2019

Last week saw UK power and gas soften with Friday’s close of 53.23 p/therm in the Winter-19 NBP contract, around 2 p/therm (c. 3.5%) lower than Monday’s settlement. A similar but less pronounced pattern could be seen in the power markets with the Winter-19 UK Baseload contract losing around £1/MWh (1.5%) over the week. 

The largest move in the front season NBP contract was a 3 p/therm sell-off seen on Monday. The rest of the week saw trading in a 3p range with an upper limit of c. 54 p/therm. The week saw several periods where the market attempted to rally and push through the 54 p/therm level, with both Wednesday and Friday posting small gains on the day. A better showing from renewables last week would have certainly been one thing holding back gas prices from a move higher.

In the grand scheme of things, UK power markets continue to follow gas, with additional noise being provided by renewable output and the strength in the carbon market. The Dec-19 EUA contract saw a trading range of around €2/tonne from the €29.5/tonne high of the week. Many in the market were discussing bearish indicators for most of last week in the EUA market, but carbon rallied hard on Friday to regain most of the losses seen over the week to settle close to €29/tonne. With the psychological target of €30/tonne still very much in sight, these prices will be providing some support to UK power pricing.

With the current tensions in the Gulf, it is difficult not to discuss oil markets this week. Much of last week was dominated by good news for oil markets, with US supply anxiety waning due to tropical storm Barry moving on as well as public displays of diplomacy from both the US and Iran. However, late in the week tensions rose abruptly with the US claiming to have shot down an Iranian drone that Tehran denied losing and the Iranians seizing a vessel in the Strait that they reported to be transporting smuggled fuel. This morning front month oil contract are up c. 2% on this news and any potential escalation.  

This morning NBP gas has shown strength with the front season trading up over 0.5 p/therm. This is despite the UK NTS opening long with supply exceeding forecasted demand by c. 25 mscm.  However, this length is not due to the supply picture shifting materially but rather the demand returning closer to seasonal norms due to forecasted warmer weather today and in the rest of the coming week. The weather should also provide some resistance to the NBP with wind currently adding c. 9 GW (c.30%) to the generation stack and solar already adding 1.5 GW (5%) with the potential to grow significantly with the sunny weather predicted. Significantly higher temperatures could also bring increased demand from AC, meaning that if the renewable presence on the grid isn’t enough to meet this higher demand, gas burn will have to step in again to provide support. Additionally, the Dec-19 EUA contract is up c. €0.3/tonne and could be eyeing a move higher to the €30/tonne level discussed earlier.

Overall, the markets currently seem to be lacking direction with weak fundamentals being offset by increased geopolitical risk resulting in high levels of volatility. Points of interest in the news this week will be increased tensions between Iran and the UK/US as well as the UK Conservative Party leadership contest outcome and any effects this has on the currency and commodity markets.
 

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