Year-ahead gas and power prices continue to trade sideways at a clear discount to the highs hit in early November. Contracts for the remainder of winter continue to weaken on improved short-term fundamentals. However, long-term gas contracts have pushed higher, supported by a sharp rise in crude oil. Crude oil prices surged more than 8% on Wednesday – the highest one-day rally in nine months – after OPEC reached a deal to cut production for the first time since 2008. Hope that the deal will lead to a quicker rebalancing in the oil market pushed prices to highs of $52/barrel. The rise in oil prices supported gains on the far gas curve due to the use of long-term oil-linked gas contracts in Europe.
A cold snap across the UK this week has pushed gas and power demand to the highest levels for the winter so far. However, both systems are showing a strong supply response. The gas market is importing strongly from the Continent, utilising extensive European gas storage reserves. Total stocks in Europe are still at their highest level than in any previous year, despite withdrawing supply since mid-October. The UK supply outlook is further boosted by strong pipeline imports from Norway and the Netherlands, medium range storage withdrawals and LNG sendout. The first LNG tanker for December has been confirmed following four deliveries in November. Centrica announced that Rough storage withdrawals will be made available no later than 9 December. This will add a further supply source to the gas market and the news has weighed heavily on gas prices for Q1 2017. An improvement in temperature forecasts for December is also adding downside to prices. The current cold snap is expected to end early next week with temperatures rising sharply to above seasonal normal levels until mid-December.
Improved French nuclear availability has boosted the supply outlook for power this winter. Over 6GW of capacity has returned to the French grid, reducing system tightness in Europe and helping France return to a position of net exports. Day-ahead power prices remain susceptible to price spikes, particularly on days of low wind generation. While the system has coped with winter-high demand levels this week, National Grid is forecasting negative power margins for much of next week. Tight supply margins are still expected to remain a problem for the remainder of this winter and again in 2017/18.