Wholesale gas and power contracts have extended their uptrend in the last week, with several forward contracts reaching levels last seen in June. Tighter supply-demand fundamentals and gains in the wider energy mix have supported prices. Temperatures in the UK have dipped below seasonal normal and are expected to remain cool next week, supporting domestic demand. Exports to Europe also remain strong, as the Continent experiences a more severe cold snap, expected to last for most of October.
Day-ahead gas prices have hit 40p/therm for the first time since October last year, having risen over 20% since Monday, with gains spreading further across the curve. Norwegian imports have risen sharply with field production switching to winter profiles, leading to increased output. However, this has been offset by lower LNG supplies. No tankers have yet been booked for arrival this month, tightening supplies significantly from September.
Gains were even sharper in the electricity market, as it continues to draw support from restricted French nuclear plant availability and the subsequent increase in demand for fossil fuel generation. Wholesale year-ahead power prices have broken above their June highs, with contracts for delivery in the remainder of 2016 rising sharply on the back of a wider commodity uptrend. The November and December power markets have jumped more than 20% since the end of September. Sharp increases in carbon and coal prices have pushed up the cost of coal-fired generation, which has recently replaced CCGT as the UK’s marginal fuel source, coming online as and when required to meet demand. The higher cost of coal burn has helped to drive up electricity prices in the last week.
The market has also drawn support from rising oil prices. Brent crude has reached three-month highs at over $51/barrel following the agreement between OPEC producers to reduce their output quotas. Stocks fell a further 3 million barrels last week, adding further support, but remain close to all-time highs.